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

42 Pages Posted: 10 Mar 2011  

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Matthew Cannon

CoreLogic

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: March 2011

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.

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: https://ssrn.com/abstract=1781021 or http://dx.doi.org/10.2139/ssrn.1781021

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 )

40 Pacifica, Suite 900
Irvine, CA 92618
United States

Leonard I. Nakamura

Federal Reserve Banks - 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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