Subprime mortgages and the housing bubble |
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Authors: | Jan K. Brueckner Paul S. Calem |
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Affiliation: | a Department of Economics, University of California, Irvine, 3151 Social Science Plaza, Irvine, CA 92697, United States b Board of Governors of the Federal Reserve System, Washington, DC 20551, United States c Federal Reserve Bank of Philadelphia, 10 Independence Mall, Philadelphia, PA 19106, United States |
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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. These ideas are illustrated in a theoretical model, and tentative support is found in empirical work exploring the connection between price expectations and the extent of subprime lending. |
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Keywords: | R00 G21 |
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