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Residential Mortgage Lending and Borrower Risk: The Relationship between Mortgage Spreads and Individual Characteristics

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Author Info
Chiang, Raymond C
Chow, Ying-Foon
Liu, Ming
Abstract

The mortgage banking environment in Hong Kong is quite different from that in the United States. For example, the secondary mortgage market and mortgage insurance only started after 1997. Using a large data set on mortgages, we examine empirically how mortgage rates in this market vary with various individual borrower, property, and loan characteristics. We find that mortgage rates in Hong Kong do vary with individual characteristics, which suggests credit sorting according to both prepayment risk and default risk, as a higher mortgage rate is found to be related to either higher collateral (a lower loan-to-value ratio) or slower prepayment. The empirical results suggest that lenders in Hong Kong can observe the risk type of individual borrowers to a certain extent and charge a corresponding mortgage spread. Overall, the evidence is consistent with the sorting-by-observed-risk paradigm as in Berger and Udell (1990). Copyright 2002 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Real Estate Finance & Economics.

Volume (Year): 25 (2002)
Issue (Month): 1 (July)
Pages: 5-32
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Handle: RePEc:kap:jrefec:v:25:y:2002:i:1:p:5-32

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Web page: http://www.springerlink.com/link.asp?id=102945

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  1. Wolter Hassink & Michiel Leuvensteijn, 2007. "Measuring Transparency in the Dutch Mortgage Market," De Economist, Springer, vol. 155(1), pages 23-47, March. [Downloadable!] (restricted)
  2. Wolter Hassink & Michiel van Leuvensteijn, . "Price-setting and Price Dispersion in the Dutch Mortgage Market," CPB Discussion Papers 21, CPB Netherlands Bureau for Economic Policy Analysis. [Downloadable!]
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  3. Sumit Agarwal & Brent W. Ambrose, 2008. "Does it pay to read your junk mail? evidence of the effect of advertising on home equity credit choices," Working Paper Series WP-08-09, Federal Reserve Bank of Chicago. [Downloadable!]
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