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Subprime lending: An investigation of economic efficiency

Author

Listed:
  • Howard Lax
  • Michael Manti
  • Paul Raca
  • Peter Zorn

Abstract

Subprime lending, a fast‐growing and controversial segment of the mortgage market, remains unevenly studied and poorly understood. Relying principally on a survey conducted for Freddie Mac by the Gallup Organization, we provide an overview of subprime lending, characterize the types of borrowers in this market segment, and assess the service they receive from lenders. We find that subprime borrowers generally are higher‐risk than their prime counterparts and pay higher rates and fees for their mortgages. They are disproportionately minority and lower income, older, less well educated, less financially sophisticated, and less likely to search for the best interest rate when applying for a mortgage. We use three measures to assess the efficiency of the subprime market. Although none of them is conceptually conclusive, and each has its flaws of execution, all three suggest that concerns over the relative efficiency of the subprime market may be warranted.

Suggested Citation

  • Howard Lax & Michael Manti & Paul Raca & Peter Zorn, 2004. "Subprime lending: An investigation of economic efficiency," Housing Policy Debate, Taylor & Francis Journals, vol. 15(3), pages 533-571.
    • Handle: RePEc:taf:houspd:v:15:y:2004:i:3:p:533-571
    DOI: 10.1080/10511482.2004.9521513
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    Citations

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    Cited by:

    1. Gwinner, William B. & Sanders, Anthony, 2008. "The sub prime crisis : implications for emerging markets," Policy Research Working Paper Series 4726, The World Bank.
    2. Christine Rifflart, 2007. "La fin de l’American Dream," Post-Print hal-03459593, HAL.
    3. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.
    4. W. Scott Frame & Lawrence J. White, 2009. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 09-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    5. Barrutia Legarreta, José María & Espinosa Alejos, María Paz, 2012. "Consumer Expertise or Credit Risk? An empirical analysis of mortgage pricing," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    6. J. Collins, 2011. "Mortgage Mistakes? Demographic Factors Associated with Problematic Loan Application Behaviors," Journal of Family and Economic Issues, Springer, vol. 32(4), pages 586-599, December.
    7. Yaseen Ghulam & Kamini Dhruva & Sana Naseem & Sophie Hill, 2018. "The Interaction of Borrower and Loan Characteristics in Predicting Risks of Subprime Automobile Loans," Risks, MDPI, vol. 6(3), pages 1-21, September.
    8. Sanders, Anthony, 2008. "The subprime crisis and its role in the financial crisis," Journal of Housing Economics, Elsevier, vol. 17(4), pages 254-261, December.
    9. Brian Bucks & Karen M. Pence, 2006. "Do homeowners know their house values and mortgage terms?," Finance and Economics Discussion Series 2006-03, Board of Governors of the Federal Reserve System (U.S.).
    10. Zsuzsa Huszár & George Lentz & Wei Yu, 2012. "Does mandatory disclosure affect subprime lending to minority neighborhoods?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(4), pages 900-924, October.
    11. Marvin Smith & Christy Hevener, 2014. "Subprime lending over time: the role of race," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 38(2), pages 321-344, April.
    12. repec:hal:spmain:info:hdl:2441/2492 is not listed on IDEAS
    13. Christine Rifflart, 2007. "La fin de l’American Dream," SciencePo Working papers Main hal-03459593, HAL.
    14. Yaseen Ghulam & Sophie Hill, 2017. "Distinguishing between Good and Bad Subprime Auto Loans Borrowers: The Role of Demographic, Region and Loan Characteristics," Review of Economics & Finance, Better Advances Press, Canada, vol. 10, pages 49-62, November.
    15. Bocian, Debbie Gruenstein & Ernst, Keith S. & Li, Wei, 2008. "Race, ethnicity and subprime home loan pricing," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 110-124.
    16. Christine Rifflart, 2007. "La fin de l’American Dream," Sciences Po publications info:hdl:2441/2492, Sciences Po.

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