Mortgage Default Option Mispricing and Procyclicality

32 Pages Posted: 21 Jun 2013 Last revised: 31 Oct 2013

See all articles by Andrew Davidson

Andrew Davidson

Andrew Davidson and Co., Inc.

Alex Levin

Andrew Davidson and Co., Inc.

Susan M. Wachter

University of Pennsylvania - Wharton School, Department of Real Estate ; University of Pennsylvania - Finance Department

Date Written: October 24, 2013

Abstract

This paper addresses the expansion and performance of non-standard mortgage lending products to better understand the impact of such products on borrowers and the financial system. We show that ex ante measured credit risk of these instruments increased and this risk was mispriced. We also examine why the expanded lending box did not increase homeownership rates in the bubble years 2004 to 2007. We conclude with policy implications.

Keywords: Mortgage, Default, Option, Mispricing, Procyclicality

Suggested Citation

Davidson, Andrew and Levin, Alex and Wachter, Susan M., Mortgage Default Option Mispricing and Procyclicality (October 24, 2013). Available at SSRN: https://ssrn.com/abstract=2281984 or http://dx.doi.org/10.2139/ssrn.2281984

Andrew Davidson

Andrew Davidson and Co., Inc. ( email )

65 Bleecker Street
Fifth Floor
New York, NY 10012
United States

Alex Levin

Andrew Davidson and Co., Inc. ( email )

65 Bleecker Street
Fifth Floor
New York, NY 10012
United States

Susan M. Wachter (Contact Author)

University of Pennsylvania - Wharton School, Department of Real Estate ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104-6330
United States
215-898-6355 (Phone)

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

University of Pennsylvania - Finance Department ( email )

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

HOME PAGE: http://real.wharton.upenn.edu/~wachter/index.html

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