Why are Aggressive Mortgage Products Bad for the Housing Market?

35 Pages Posted: 28 Mar 2016

See all articles by Andrew Davidson

Andrew Davidson

Andrew Davidson and Co., Inc.

Alex Levin

Andrew Davidson and Co., Inc.

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area

Susan M. Wachter

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

Date Written: March 27, 2016

Abstract

In this paper we identify the relationship of the pricing of residential mortgage lending products to their market share during the run up to the financial crisis of 2007. We then use this relationship to decompose the total impact of nontraditional mortgage products on house price declines during the crisis into impact due to their pricing and due to other characteristics. Using alternative measures of mortgage pricing, we document that pricing has a statistically significant but small impact on the difference in market share of nontraditional mortgage products by State. We further document that factors which lead to the increased market share of nontraditional products other than pricing are likely responsible for the impact of those products on the house price declines during the crisis. Our findings imply that going forward underwriting standards and other characteristics of nontraditional mortgage products should be monitored and regulated.

Suggested Citation

Davidson, Andrew and Levin, Alex and Pavlov, Andrey D. and Wachter, Susan M., Why are Aggressive Mortgage Products Bad for the Housing Market? (March 27, 2016). Available at SSRN: https://ssrn.com/abstract=2755273 or http://dx.doi.org/10.2139/ssrn.2755273

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

Andrey D. Pavlov

Simon Fraser University (SFU) - Finance Area ( email )

Burnaby, British Columbia V5A 1S6
Canada
604 291 5835 (Phone)
604 291 4920 (Fax)

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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