Subprime mortgages and the housing bubble

Jan Brueckner, Paul S. Calem and Leonard Nakamura

No 11-12, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: This paper explores the link between the house-price expectations of mortgage lenders and the extent of subprime lending. It argues that bubble conditions in the housing market are likely to spur subprime lending, with favorable price expectations easing the default concerns of lenders and thus increasing their willingness to extend loans to risky borrowers. Since the demand created by subprime lending feeds back onto house prices, such lending also helps to fuel an emerging housing bubble. The paper, however, focuses on the reverse causal linkage, where subprime lending is a consequence rather than a cause of bubble conditions. These ideas are illustrated in a theoretical model, and empirical work tests for a connection between price expectations and the extent of subprime lending.

Keywords: Subprime mortgage; Global financial crisis (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ure
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Citations: View citations in EconPapers (1)

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Journal Article: Subprime mortgages and the housing bubble (2012)
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