Mortgage Risk Premia During the Housing Bubble

42 Pages Posted: 12 Dec 2017  

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: December 9, 2017

Abstract

How did mortgage risk pricing for securitized loans change during the lead-up to the 2008 financial crisis? Using a database from a major American bank that serves as trustee for private-label securitized loans, this paper shows that the decline in underwriting standards was accompanied by a decline in credit spreads on mortgages, after adjusting for loan/borrower characteristics. Observable information, including FICO and LTV, became less influential on mortgage risk pricing over time during the housing bubble. As the volume of mortgages expanded and lending terms eased during the bubble, the increase in risk failed to be reflected in higher risk premiums. The result is consistent with a rightward shift of the mortgage credit supply curve during the housing bubble.

Keywords: mortgage, securitization, housing bubble, risk premium, credit spread

JEL Classification: R31

Suggested Citation

Levitin, Adam J. and Lin, Desen and Wachter, Susan M., Mortgage Risk Premia During the Housing Bubble (December 9, 2017). 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 )

3718 Locust Walk
McNeil Building
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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