Subprime Lenders and Mortgage Market Completion

Abstract

Without a subprime market, some borrowers by virtue of poor credit history, unstable income, and other characteristics are unable to qualify for a mortgage. With a subprime market, there is a more complete credit supply schedule with the market pricing for poorer credit quality in the mortgage rate. By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain. Low-credit applicants otherwise denied funding are able to qualify by paying higher interest rates in exchange for offering more equity or lower loan-to-value ratios. This prediction is consistent with the subprime applicants financing or refinancing their mortgages at relatively low loan-to-value ratios. Copyright Springer Science + Business Media, Inc. 2004mortgages, market completion, subprime lending,

Differential Access to and Pricing of Home Mortgages: 2004 through 2009

“…The resulting expansion in the subprime submarket arguably improved service to minority borrowers and low‐income and minority communities. Chinloy and MacDonald (2005), for example, consider the advent of subprime a “completion” of the mortgage market, and state that “By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain.…”

Entrepreneurial subjectivity and the political economy of daily life in the time of finance

“…An ageing UK society and the emergence of a pensions crisis in the 1970s resulted in the Thatcher government discouraging the reliance on state insurance and occupational welfare (Blackburn, 2002;Langley, 2008a), so that households began to rely on private pensions, the success of which is dependent on the performance of a fund on the market rather than contributions by the state and employers. Likewise, increased levels of borrowing among large portions of the population with the spread of asset-and mortgage-backed securities to the UK in 1986 (Wainwright, 2009) are contingent on the transfer of the risk of default to households in the form of fees and interest payments: the extension of credit to low-income, 'high-risk' households was initially considered a 'social welfare gain' (Chinloy and MacDonald: 2005) that enabled them to borrow, while ensuring a profit could be made from loans with a higher risk of default by charging higher rates and fees (Dymski, 2005). There is thus a certain level of responsibilization in the need to take initiatives with investments, borrow wisely within one's constraints, and to become financially literate to properly engage with the markets that appear to be the source of provision and opportunity for even household affairs.…”

“…Although Chinloy and MacDonald (2005) consider 'market completion' -'the completion of the credit supply schedule with the market pricing for poorer quality credit' allowing subprime lenders to 'reduce borrowing constraints' on high-risk borrowers-to be a 'social welfare gain ' (2005: 153) in making finance markets accessible to more households, it is true that high-risk borrowers have been targeted by exploitative lenders, looking to take advantage of the high interest rates and repayment cycles applied to their borrowers.…”

The impact of local predatory lending laws on the flow of subprime credit

“…In contrast, if there is an application cost (time or money) potential applicants should be deterred from applying when the chance of being accepted is low. 4 Therefore, we should expect that a tightening of subprime lending standards would be associated with a reduction in the number of subprime applications. In addition, the impact of the law on the rejection rate is indeterminate and will depend on the shape of the application function (probability of applying) and its responsiveness to changing lending standards.…”

“…In this fashion the subprime market completes the mortgage market and can be welfare enhancing (Chinloy and MacDonald [4]) because it provides the opportunity of home ownership to a larger portion of the population.…”