Predatory Mortgage Lending

39 Pages Posted: 23 Oct 2008  

Philip Bond

University of Washington - Michael G. Foster School of Business

David K. Musto

University of Pennsylvania - Finance Department

Bilge Yilmaz

University of Pennsylvania - Finance Department

Date Written: October 10, 2008

Abstract

Regulators express growing concern over predatory loans, which the authors take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, they identify the circumstances in which it arises both with and without competition. The authors find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. They use their model to analyze the effects of legislative interventions.

Suggested Citation

Bond, Philip and Musto, David K. and Yilmaz, Bilge, Predatory Mortgage Lending (October 10, 2008). FRB of Philadelphia Working Paper No. 08-24. Available at SSRN: https://ssrn.com/abstract=1288094 or http://dx.doi.org/10.2139/ssrn.1288094

Philip Bond (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

David K. Musto

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States

Bilge Yilmaz

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-1163 (Phone)
215-898-6200 (Fax)

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