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Article
Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply
Journal of Real Estate Finance and Economics
  • Joseph Nichols, University of Maryland - College Park
  • Anthony Pennington-Cross, Marquette University
  • Anthony Yezer, George Washington University
Document Type
Article
Language
eng
Format of Original
23 p.
Publication Date
3-1-2005
Publisher
Springer
Abstract
In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.
Comments

Accepted version. Journal of Real Estate Finance and Economics, Vol. 30, No. 2 (March 2005): 197-219. DOI. © Springer Publishing Company 2005. Used with permission.

Anthony Pennington-Cross was affiliated with the Federal Reserve Bank of St. Louis at the time of publication.

Citation Information
Joseph Nichols, Anthony Pennington-Cross and Anthony Yezer. "Borrower Self-Selection, Underwriting Costs, and Subprime Mortgage Credit Supply" Journal of Real Estate Finance and Economics (2005) ISSN: 0895-5638
Available at: http://works.bepress.com/anthony_pennington_cross/19/