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The rise of risk-based pricing of mortgage interest rates in Italy

  • Magri, Silvia
  • Pico, Raffaella

This paper assesses how much mortgage interest rates in Italy are priced on credit risk as proxied by the probability of household mortgage delinquency estimated using the EU-Silc database. Owing to data availability, we restrict the analysis of mortgage pricing to Italian households. Consistent with the more widespread use of credit scoring, estimates indicate that Italian lenders have increasingly priced mortgage interest rates on household credit risk. For mortgages granted between 2000 and 2007, we find that a 1% point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates, lower than the 38 basis point premium Edelberg (2006) estimated for the US at the end of the 1990s.

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File URL: http://www.sciencedirect.com/science/article/B6VCY-517YN68-1/2/1a75362094a0eb4a34bfc454fab5a403
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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 5 (May)
Pages: 1277-1290

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:5:p:1277-1290
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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  13. Wendy Edelberg, 2003. "Risk-based pricing of interest rates in household loan markets," Finance and Economics Discussion Series 2003-62, Board of Governors of the Federal Reserve System (U.S.).
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  15. Duca, John V & Rosenthal, Stuart S, 1994. "Do Mortgage Rates Vary Based on Household Default Characteristics? Evidence on Rate Sorting and Credit Rationing," The Journal of Real Estate Finance and Economics, Springer, vol. 8(2), pages 99-113, March.
  16. Giorgio Albareto & Michele Benvenuti & Sauro Mocetti & Marcello Pagnini & Paola Rossi, 2008. "Lending organizational structure and the use of credit scoring: evidence from a survey on Italian banks," Questioni di Economia e Finanza (Occasional Papers) 12, Bank of Italy, Economic Research and International Relations Area.
  17. Hartmann, Philipp, 2010. "Interaction of market and credit risk," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 697-702, April.
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