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Subprime mortgages and the housing bubble

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

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.

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Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-12.

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Date of creation: 2011
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Handle: RePEc:fip:fedpwp:11-12
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  1. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  2. Dell’Ariccia, G. & Igan, D. & Laeven, L., 2009. "Credit Booms and Lending Standards : Evidence from the Subprime Mortgage Market," Discussion Paper 2009-46 S, Tilburg University, Center for Economic Research.
  3. Andrey Pavlov & Susan Wachter, 2011. "Subprime Lending and Real Estate Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 39(1), pages 1-17, 03.
  4. Luisa Lambertini & Caterina Mendicino & Maria Teresa Punzi, 2010. "Expectations-Driven Cycles in the Housing Market," Working Papers 201001, Center for Fiscal Policy, Swiss Federal Institute of Technology Lausanne, revised Oct 2010.
  5. Matteo Iacoviello & Stefano Neri, 2010. "Housing Market Spillovers: Evidence from an Estimated DSGE Model," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(2), pages 125-64, April.
  6. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
  7. David Lopez-Salido & Oscar Arce, 2008. "Housing Bubbles," 2008 Meeting Papers 134, Society for Economic Dynamics.
  8. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
  9. William C. Wheaton & Gleb Nechayev, 2008. "The 1998 ?2005 Housing "Bubble" and the Current "Correction": What’s Different This Time?," Journal of Real Estate Research, American Real Estate Society, vol. 30(1), pages 1-26.
  10. Charles D. Anderson & Dennis R. Capozza & Robert Van Order, 2011. "Deconstructing a Mortgage Meltdown: A Methodology for Decomposing Underwriting Quality," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 609-631, 06.
  11. Charles Himmelberg & Christopher Mayer & Todd Sinai, 2005. "Assessing high house prices: bubbles, fundamentals, and misperceptions," Staff Reports 218, Federal Reserve Bank of New York.
  12. Timothy J. Riddiough & Howard E. Thompson, 1993. "Commercial Mortgage Pricing with Unobservable Borrower Default Costs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 265-291.
  13. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
  14. Coleman IV, Major & LaCour-Little, Michael & Vandell, Kerry D., 2008. "Subprime lending and the housing bubble: Tail wags dog?," Journal of Housing Economics, Elsevier, vol. 17(4), pages 272-290, December.
  15. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
  16. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  17. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-74, May.
  18. James B. Kau & Donald C. Keenan & Taewon Kim, 1993. "Transaction Costs, Suboptimal Termination and Default Probabilities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 247-263.
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