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A Lucas Critique of Mortgage Lending: Theory, Evidence, and Implications

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Listed:
  • Brent C. Smith

    (Virginia Commonwealth University)

  • Anthony M. Yezer

    (George Washington University)

Abstract

Mortgage risk assessment is based on hazard models using data on “seasoned” mortgages, endorsed in previous years. These models assume that the lender’s pricing decision has no effect on the parameters of the hazard function. This paper argues that, when indicators of creditworthiness that can be influenced by applicants have a significant effect on credit cost, applicants behave strategically to influence the information disclosed to lenders. This gives rise to a Lucas Critique in which models generally perform well but occasionally fail because applicants are able and motivated to behave strategically.

Suggested Citation

  • Brent C. Smith & Anthony M. Yezer, 2025. "A Lucas Critique of Mortgage Lending: Theory, Evidence, and Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 70(4), pages 637-676, May.
    • Handle: RePEc:kap:jrefec:v:70:y:2025:i:4:d:10.1007_s11146-023-09951-2
    DOI: 10.1007/s11146-023-09951-2
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