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Predatory mortgage lending

Author

Listed:
  • Bond, Philip
  • Musto, David K.
  • Yilmaz, Bilge

Abstract

Regulators express growing concern over predatory loans, which we take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, we identify the circumstances in which it arises both with and without competition. We find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. We use our model to analyze the effects of legislative interventions.

Suggested Citation

  • Bond, Philip & Musto, David K. & Yilmaz, Bilge, 2009. "Predatory mortgage lending," Journal of Financial Economics, Elsevier, vol. 94(3), pages 412-427, December.
  • Handle: RePEc:eee:jfinec:v:94:y:2009:i:3:p:412-427
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Patrick Payne & Tammy Huffman Ph.D, 2012. "Minimizing predatory lending: Designing a long-term compensation structure to minimize the actions of opportunistic mortgage brokers," International Journal of Business and Social Research, MIR Center for Socio-Economic Research, vol. 2(5), pages 8-19, October.
    2. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2014. "Predatory lending and the subprime crisis," Journal of Financial Economics, Elsevier, vol. 113(1), pages 29-52.
    3. repec:eee:jbfina:v:82:y:2017:i:c:p:165-179 is not listed on IDEAS
    4. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2014. "Race, Ethnicity and High Cost Mortgage Lending," Working papers 2014-36, University of Connecticut, Department of Economics.
    5. Berndt, Antje & Hollifield, Burton & Sandås, Patrik, 2017. "What Broker Charges Reveal about Mortgage Credit Risk," Working Paper Series 336, Sveriges Riksbank (Central Bank of Sweden).
    6. Ming Pu & Gang-Zhi Fan & Yongheng Deng, 2014. "Breakeven Determination of Loan Limits for Reverse Mortgages under Information Asymmetry," The Journal of Real Estate Finance and Economics, Springer, vol. 48(3), pages 492-521, April.
    7. Murizah Osman Salleh & Aziz Jaafar & M. Shahid Ebrahim, 2011. "The Inhibition of Usury (Riba An-Nasi'ah) and the Economic Underdevelopment of the Muslim World," Working Papers 11002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    8. Christine L. Dobridge, 2016. "For Better and for Worse? Effects of Access to High-Cost Consumer Credit," Finance and Economics Discussion Series 2016-056, Board of Governors of the Federal Reserve System (U.S.).
    9. Eugene Amromin & Jennifer Huang & Clemens Sialm & Edward Zhong, 2010. "Complex mortgages," Working Paper Series WP-2010-17, Federal Reserve Bank of Chicago.
    10. Beltratti, Andrea & Benetton, Matteo & Gavazza, Alessandro, 2017. "The role of prepayment penalties in mortgage loans," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 165-179.
    11. J. Michael Collins, 2014. "Protecting Mortgage Borrowers through Risk Awareness: Evidence from Variations in State Laws," Journal of Consumer Affairs, Wiley Blackwell, vol. 48(1), pages 124-146, March.
    12. repec:eee:juecon:v:99:y:2017:i:c:p:62-78 is not listed on IDEAS
    13. Jevgenijs Steinbuks & Gregory Elliehausen, 2014. "The Economic Effects of Legal Restrictions on High-Cost Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 49(1), pages 47-72, July.
    14. M. Shahid Ebrahim & Seema Makhdoomi & Mustapha Sheikh, 2012. "The Political Economy and the Perennial Underdevelopment of the Muslim World," Working Papers 12011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).

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