Subprime Mortgages and the Housing Bubble
Jan K. Brueckner
University of California, Irvine - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Paul S. Calem
Federal Reserve Banks - Federal Reserve Bank of Philadelphia
Leonard I. Nakamura
Federal Reserve Bank of Philadelphia
February 1, 2011
FRB of Philadelphia Working Paper No. 11-12
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. The paper, however, focuses on the reverse causal linkage, where subprime lending is a consequence rather than a cause of bubble conditions. These ideas are illustrated in a theoretical model, and empirical work tests for a connection between price expectations and the extent of subprime lending.
Number of Pages in PDF File: 47working papers series
Date posted: March 7, 2011
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