Mortgage Risk Premiums during the Housing Bubble

48 Pages Posted: 12 Dec 2017 Last revised: 4 Sep 2018

Adam J. Levitin

Georgetown University Law Center

Desen Lin

University of Pennsylvania, Department of Economics

Susan M. Wachter

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

Date Written: August 24, 2018

Abstract

How did pricing for mortgage credit risk change during the years prior to the 2008 financial crisis? Using a database from a major American bank that served as trustee for private-label mortgage-backed securitized (PLS) loans, this paper identifies a decline in credit spreads on mortgages conditioned on loan and borrower characteristics. We show that observable risk factors, FICO score and loan-to-value ratios, have less of an impact on mortgage pricing over time. As the volume of PLS mortgages expanded and lending terms eased, risk premiums failed to price the increase in risk.

Keywords: housing bubble, risk premium, securitization, private-label

JEL Classification: R31, G01, G12, G20, G21

Suggested Citation

Levitin, Adam J. and Lin, Desen and Wachter, Susan M., Mortgage Risk Premiums during the Housing Bubble (August 24, 2018). Available at SSRN: https://ssrn.com/abstract=3086314 or http://dx.doi.org/10.2139/ssrn.3086314

Adam J. Levitin

Georgetown University Law Center ( email )

600 New Jersey Avenue, NW
Washington, DC 20001
United States

Desen Lin

University of Pennsylvania, Department of Economics ( email )

PCPSE 535, 133 South 36th Street
Philadelphia, PA 19104
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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