Credit cycle and adverse selection effects in consumer credit markets -- evidence from the HELOC market
The authors empirically study how the underlying riskiness of the pool of home equity line of credit originations is affected over the credit cycle. Drawing from the largest existing database of U.S. home equity lines of credit, they use county-level aggregates of these loans to estimate panel regressions on the characteristics of the borrowers and their loans, and competing risk hazard regressions on the outcomes of the loans. The authors show that when the expected unemployment risk of households increases, riskier households tend to borrow more. As a consequence, the pool of households that borrow on home equity lines of credit worsens along both observable and unobservable dimensions. This is an interesting example of a type of dynamic adverse selection that can worsen the risk characteristics of new lending, and suggests another avenue by which the precautionary demand for liquidity may affect borrowing.
|Date of creation:||2011|
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- Thomas A. Garrett & Rubén Hernández-Murillo & Michael T. Owyang, 2005.
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American Finance Association, vol. 65(2), pages 655-686, 04.
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"Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options,"
Berkeley Program on Housing and Urban Policy, Working Paper Series
qt96r560pg, Berkeley Program on Housing and Urban Policy.
- Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
- Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Keys, Benjamin J. & Mukherjee, Tanmoy & Seru, Amit & Vig, Vikrant, 2009. "Financial regulation and securitization: Evidence from subprime loans," Journal of Monetary Economics, Elsevier, vol. 56(5), pages 700-720, July.
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