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http://ssrn.com/abstract=1781021
 
 

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Credit Cycle and Adverse Selection Effects in Consumer Credit Markets - Evidence from the HELOC Market


Paul S. Calem


Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Matthew Cannon


CoreLogic

Leonard I. Nakamura


Federal Reserve Bank of Philadelphia

March 2011

FRB of Philadelphia Working Paper No. 11-13

Abstract:     
The authors empirically study how the underlying riskiness of the pool of home equity line of credit originations is affected over the credit cycle. Drawing from the largest existing database of U.S. home equity lines of credit, they use county-level aggregates of these loans to estimate panel regressions on the characteristics of the borrowers and their loans, and competing risk hazard regressions on the outcomes of the loans. The authors show that when the expected unemployment risk of households increases, riskier households tend to borrow more. As a consequence, the pool of households that borrow on home equity lines of credit worsens along both observable and unobservable dimensions. This is an interesting example of a type of dynamic adverse selection that can worsen the risk characteristics of new lending, and suggests another avenue by which the precautionary demand for liquidity may affect borrowing.

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Date posted: March 10, 2011  

Suggested Citation

Calem, Paul S. and Cannon, Matthew and Nakamura, Leonard I., Credit Cycle and Adverse Selection Effects in Consumer Credit Markets - Evidence from the HELOC Market (March 2011). FRB of Philadelphia Working Paper No. 11-13. Available at SSRN: http://ssrn.com/abstract=1781021 or http://dx.doi.org/10.2139/ssrn.1781021

Contact Information

Paul S. Calem (Contact Author)
Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )
Ten Independence Mall
Philadelphia, PA 19106-1574
United States
Matthew Cannon
CoreLogic ( email )
4 First American Way
Santa Ana, CA 92707
United States
Leonard I. Nakamura
Federal Reserve Bank of Philadelphia ( email )
Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)
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