Financial Constraints, Inflated Home Prices, and Borrower Default during the Real-Estate Boom
AbstractDuring the housing boom, many subprime home buyers were not able to make a mort- gage down payment and therefore were at risk of being rationed from the market. To resolve the issue, some buyers, sellers and intermediaries artificially expanded the scope of transactions by including items that cannot be collateralized. As a result, observed house prices were higher and mortgages larger, ultimately relaxing buyers' financial constraints. I estimate that between 2005 and 2008, up to 16% of highly leveraged (greater than 95% loan-to-value) transactions in Cook County, Illinois were inflated (with prices higher by 6% to 15%). Inated transactions are more likely in low-income neighborhoods and when intermediaries have a high stake in the transaction. Although borrowers were twice as likely to default, their mortgage rates were not higher.
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Bibliographic InfoPaper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2009-1.
Date of creation: Jun 2009
Date of revision:
Find related papers by JEL classification:
- D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-11-14 (All new papers)
- NEP-MAC-2009-11-14 (Macroeconomics)
- NEP-URE-2009-11-14 (Urban & Real Estate Economics)
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