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Risky mortgages and mortgage default premiums

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  • John Krainer
  • Stephen F. LeRoy

Abstract

Mortgage lenders impose a default premium on the loans they originate to compensate for the possibility that borrowers won’t make payments. The housing boom of the 2000s was characterized by increasing riskiness of the borrowers approved for mortgages and the structures of the loans themselves. Despite these changes in risk, a pricing model can justify the spreads contained in mortgages made during this period based on what at the time seemed to be reasonable expectations for house price appreciation. Contrary to those expectations, prices fell dramatically.

Suggested Citation

  • John Krainer & Stephen F. LeRoy, 2010. "Risky mortgages and mortgage default premiums," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue dec20.
  • Handle: RePEc:fip:fedfel:y:2010:i:dec20:n:2010-38
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    References listed on IDEAS

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    1. John Krainer & Stephen F. LeRoy & Munpyung O, 2009. "Mortgage default and mortgage valuation," Working Paper Series 2009-20, Federal Reserve Bank of San Francisco.
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    Keywords

    Mortgage loans ; Default (Finance);

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