Subprime Lending and Real Estate Markets
Susan M. Wachter
University of Pennsylvania - Wharton School, Department of Real Estate
Andrey D. Pavlov
Simon Fraser University (SFU) - Finance Area
International Monetary Fund (IMF)
U of Penn, Inst for Law & Econ Research Paper No. 08-35
MORTGAGE AND REAL ESTATE FINANCE, Stefania Perrucci, ed., Risk Books, 2008
The recent credit crunch, and liquidity deterioration, in the mortgage market have led to falling house prices and foreclosure levels unprecedented since the Great Depression. A critical factor in the post-2003 house price bubble was the interaction of financial engineering and the deteriorating lending standards in real estate markets, which fed onto each other, and caused an unsustainable rise in prices, and then collapse. Empirical evidence points to amplification in the correction of real estate prices as the direct result of the end of access to under-priced financing. Thus the pro-cyclicality of lending standards has been the driving factor in both the housing boom and subsequent collapse.
Number of Pages in PDF File: 17
Keywords: Real Property, real estate, realty, mortgages, housing prices, credit crunch, foreclosures, financial engineering, lending standards, housing market collapse, underpriced financing, interest only mortgages, negative amortization mortgages, leverage, cyclicality, housing bubble
JEL Classification: D12, K11, L85Accepted Paper Series
Date posted: December 24, 2008
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