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Subprime mortgages and the housing bubble

Author

Listed:
  • Jan K. Brueckner
  • Paul S. Calem
  • Leonard I. Nakamura

Abstract

This paper explores the link between the house-price expectations of mortgage lenders and the extent of subprime lending. It argues that bubble conditions in the housing market are likely to spur subprime lending, with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers. Since the demand created by subprime lending feeds back onto house prices, such lending also helps to fuel an emerging housing bubble. The paper, however, focuses on the reverse causal linkage, where subprime lending is a consequence rather than a cause of bubble conditions. These ideas are illustrated in a theoretical model, and empirical work tests for a connection between price expectations and the extent of subprime lending.

Suggested Citation

  • Jan K. Brueckner & Paul S. Calem & Leonard I. Nakamura, 2011. "Subprime mortgages and the housing bubble," Working Papers 11-12, Federal Reserve Bank of Philadelphia.
  • Handle: RePEc:fip:fedpwp:11-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Subprime mortgage; Global financial crisis;

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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