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

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  • Camilo Sarmiento

Abstract

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.

Suggested Citation

  • Camilo Sarmiento, 2009. "Regime changes in sub-prime margins under the US housing bubble," Applied Financial Economics, Taylor & Francis Journals, vol. 19(3), pages 175-182.
    • Handle: RePEc:taf:apfiec:v:19:y:2009:i:3:p:175-182
    DOI: 10.1080/09603100701857898
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    Cited by:

    1. Camilo Sarmiento, 2012. "The role of the economic environment on mortgage defaults during the Great Recession," Applied Financial Economics, Taylor & Francis Journals, vol. 22(3), pages 243-250, February.

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