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Mortgage Risk Premiums during the Housing Bubble

Author

Listed:
  • Adam J. Levitin

    () (Georgetown University Law Center)

  • Desen Lin

    () (University of Pennsylvania)

  • Susan M. Wachter

    () (University of Pennsylvania)

Abstract

How did pricing for mortgage credit risk change during the years prior to the 2008 financial crisis? Using a database from a major American bank that served as trustee for private-label mortgage-backed securitized (PLS) loans, this paper identifies a decline in credit spreads on mortgages conditioned on loan and borrower characteristics. We show that observable risk factors, FICO score and loan-to-value ratio, had less of an impact on mortgage pricing over time. As the volume of PLS mortgages expanded and lending terms eased, risk premiums failed to price the increase in risk.

Suggested Citation

  • Adam J. Levitin & Desen Lin & Susan M. Wachter, 2020. "Mortgage Risk Premiums during the Housing Bubble," The Journal of Real Estate Finance and Economics, Springer, vol. 60(4), pages 421-468, May.
    • Handle: RePEc:kap:jrefec:v:60:y:2020:i:4:d:10.1007_s11146-018-9682-z
    DOI: 10.1007/s11146-018-9682-z
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    References listed on IDEAS

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    Cited by:

    1. Itzhak Ben-David & Pascal Towbin & Sebastian Weber, 2019. "Expectations During the U.S. Housing Boom: Inferring Beliefs from Actions," NBER Working Papers 25702, National Bureau of Economic Research, Inc.

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