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Evaluating the Costs of Increased Lending in Low and Negative Growth Local Housing Markets

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  • Fang‐xiong Gong
  • Joseph Gyourko

Abstract

The literatures on default and the evaluation of low downpayment mortgage programs are extended by showing within an options pricing framework how differences in expected price appreciation trends across housing markets can influence default and, thereby, the cost of programs designed to increase mortgage liquidity. An equilibrium mortgage rate reflecting the risk premium required to compensate for expected default‐related losses is endogenously determined within the model. Evaluating the entire process by which program losses arise strictly within a rigorous asset pricing framework has potentially important implications for policy evaluation, as the estimated present value of program losses in declining markets where expected default is high is quite sensitive to the choice of the discount rate. The implications of increased lending in low and negative price appreciation local markets are also investigated.

Suggested Citation

  • Fang‐xiong Gong & Joseph Gyourko, 1998. "Evaluating the Costs of Increased Lending in Low and Negative Growth Local Housing Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(2), pages 207-234, June.
    • Handle: RePEc:bla:reesec:v:26:y:1998:i:2:p:207-234
    DOI: 10.1111/1540-6229.00744
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    Cited by:

    1. Shu Ling Chiang & Ming Shann Tsai & Shan Jiang, 2021. "The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 361-394, September.
    2. Tsai, Ming-Shann & Liao, Szu-Lang & Chiang, Shu-Ling, 2009. "Analyzing yield, duration and convexity of mortgage loans under prepayment and default risks," Journal of Housing Economics, Elsevier, vol. 18(2), pages 92-103, June.
    3. Eddie Lam, 2002. "A Risk Management Model for MBS Issuers," International Real Estate Review, Global Social Science Institute, vol. 5(1), pages 169-195.

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