The Impact of Credit Risk Mispricing on Mortgage Lending during the Subprime Boom

We provide new evidence that mispriced mortgage insurance shifted credit supply and contributed to the mortgage boom and bust of the early 2000s. Original data on private mortgage insurance premiums from 1999 to 2016 reveal that before 2008, premiums did not vary across loans with widely different i...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2024-08, Vol.56 (5), p.1021-1052
Main Authors: KAHN, JAMES A., KAY, BENJAMIN S.
Format: Article
Language:English
Subjects:
Credit risk
default risk
financial crisis
housing finance
Insurance
Loans
mortgage insurance
Optimism
Premiums
Pricing policies
Subsidies
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Summary:We provide new evidence that mispriced mortgage insurance shifted credit supply and contributed to the mortgage boom and bust of the early 2000s. Original data on private mortgage insurance premiums from 1999 to 2016 reveal that before 2008, premiums did not vary across loans with widely different indicators of default risk. We quantify the mispricing of premiums before 2008 and show that even allowing for more optimistic beliefs, the flat premium structure resulted in cross‐subsidies and substantial adverse selection.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.13103