Document Type

Article

Language

eng

Format of Original

23 p.

Publication Date

3-2005

Publisher

Springer

Source Publication

Journal of Real Estate Finance and Economics

Source ISSN

0895-5638

Abstract

In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.

Comments

Accepted version. Journal of Real Estate Finance and Economics, Vol. 30, No. 2 (March 2005): 197-219. DOI. © 2005 Springer Publishing Company. Used with permission.

Anthony Pennington-Cross was affiliated with the Federal Reserve Bank of St. Louis at the time of publication.

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