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Subprime Lenders and Mortgage Market Completion

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  • Peter Chinloy
  • Nancy Macdonald

Abstract

Without a subprime market, some borrowers by virtue of poor credit history, unstable income, and other characteristics are unable to qualify for a mortgage. With a subprime market, there is a more complete credit supply schedule with the market pricing for poorer credit quality in the mortgage rate. By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain. Low-credit applicants otherwise denied funding are able to qualify by paying higher interest rates in exchange for offering more equity or lower loan-to-value ratios. This prediction is consistent with the subprime applicants financing or refinancing their mortgages at relatively low loan-to-value ratios. Copyright Springer Science + Business Media, Inc. 2004

Suggested Citation

  • Peter Chinloy & Nancy Macdonald, 2004. "Subprime Lenders and Mortgage Market Completion," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 153-165, November.
    • Handle: RePEc:kap:jrefec:v:30:y:2004:i:2:p:153-165
    DOI: 10.1007/s11146-004-4877-x
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    References listed on IDEAS

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    1. Goetzmann, William Nelson, 1993. "The Single Family Home in the Investment Portfolio," The Journal of Real Estate Finance and Economics, Springer, vol. 6(3), pages 201-222, May.
    2. Oliver Hart, 2001. "Financial Contracting," Journal of Economic Literature, American Economic Association, vol. 39(4), pages 1079-1100, December.
    3. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November.
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