Document Type




Format of Original

23 p.

Publication Date




Source Publication

Journal of Real Estate Finance and Economics

Source ISSN



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.


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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