Regime changes in sub-prime margins under the US housing bubble

• Autores: Camilo Sarmiento
• Localización: Applied financial economics, ISSN 0960-3107, Vol. 19, Nº. 1-3, 2009, págs. 175-182
• Idioma: inglés
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• Resumen

  • Risk-based pricing is an alignment of loan risk pricing with expected loan risk - charging a higher interest rate for higher risk (Yezer, 2002). This article shows systematic relaxation of risk pricing for sub-prime loans during the US housing bubble, a period that extended from 2001 to 2006. For example, an identical loan, but having different vintages is shown to have significantly lower premiums in 2005 than in 2003. Strikingly, for a given credit risk, estimation results show a premium reduction of 60 basis points in sub-prime originations from 2003 to 2005.