Abstract
Without a subprime market, some borrowers by virtue of poor credit history, unstable income, and other characteristics are unable to qualify for a mortgage. With a subprime market, there is a more complete credit supply schedule with the market pricing for poorer credit quality in the mortgage rate. By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain. Low-credit applicants otherwise denied funding are able to qualify by paying higher interest rates in exchange for offering more equity or lower loan-to-value ratios. This prediction is consistent with the subprime applicants financing or refinancing their mortgages at relatively low loan-to-value ratios.
This is a preview of subscription content, access via your institution.
References
Alghion, P. and P. Bolton. (1992). “An ‘Incomplete Contracts’ Approach to Financial Contracting,” Review of Economic Studies 50, 473–494.
Cotterman, R. F. (2001). Assessing Problems of Default in Local Mortgage Markets. Washington, D.C.: U.S. Department of Housing and Urban Development, Office of Policy Development and Research.
Cutts, A. C., R. Van Order, and P. M. Zorn. (2002). On the Economics of Subprime Lending. In Presented at the Georgetown Symposium on Subprime Lending.
Feschbach, D. and P. Schwinn. (1999). A Tactical Approach to Mortgage Scores, Mortgage Banking 28–35.
Focer, A. (2000). “Mortgage Fraud and Property ‘Flipping’ Skew Low-Income Housing Markets,” Shelterforce 22, 10–12.
Goetzmann, W. (1993). “The Single Family Home in the Investment Portfolio,” Journal of Real Estate Finance and Economics 6, 201–222.
Hart, O. (2001). “Financial Contracting,” Journal of Economic Literature 39, 1079–1100.
Harvard Joint Center for Housing Studies. (2002). Low-Income Mortgages 1993–2000. Cambridge, MA: Harvard Joint Center for Housing Studies.
Inside Mortgage Finance. (2002a). Inside B&C Lending. Bethesda, MD: Inside Mortgage Finance.
Inside Mortgage Finance. (2002b). The Mortgage Market Statistical Annual. Bethesda, MD: Inside Mortgage Finance.
Kennickell, A., M. Starr-McCluer, and B. Surette. (2000). “Recent Changes in U.S. Family Finances: Results from the 1998 Survey of Consumer Finances,” Federal Reserve Bulletin 86(1), 1–29.
Olney, M. (1999). “Avoiding Default: The Role of Credit in the Consumption Collapse of 1930,” Quarterly Journal of Economics 114, 319–335.
U.S. Department of Housing and Urban Development. (2000). Unequal Burden: Income and Racial Disparities in Subprime Lending. Washington, D.C.: United States Department of Housing and Urban Development.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Chinloy, P., Macdonald, N. Subprime Lenders and Mortgage Market Completion. J Real Estate Finan Econ 30, 153–165 (2005). https://doi.org/10.1007/s11146-004-4877-x
Issue Date:
DOI: https://doi.org/10.1007/s11146-004-4877-x