Subprime Lenders and Mortgage Market Completion |
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Authors: | Email author" target="_blank">Peter?ChinloyEmail author Nancy?Macdonald |
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Institution: | (1) Kogod School of Business, American University, 4400 Massachusetts Avenue, N.W., Washington, DC 20016, USA |
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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. |
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Keywords: | mortgages market completion subprime lending |
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