Abstract
AbstractMortgage risk assessment is based on hazard models using data on “seasoned” mortgages, endorsed in previous years. These models assume that the lender’s pricing decision has no effect on the parameters of the hazard function. This paper argues that, when indicators of creditworthiness that can be influenced by applicants have a significant effect on credit cost, applicants behave strategically to influence the information disclosed to lenders. This gives rise to a Lucas Critique in which models generally perform well but occasionally fail because applicants are able and motivated to behave strategically.
Publisher
Springer Science and Business Media LLC
Subject
Urban Studies,Economics and Econometrics,Finance,Accounting
Reference47 articles.
1. Agarwal, S., Ambrose, B. W., & Liu, C. (2006). Credit lines and credit utilization. Journal of Money Credit and Banking., 38(1), 1–22.
2. Agarwal, S., Ambrose, B. W., & Yao, V. W. (2016). Can regulation de-bias appraisers. Journal of Financial Intermediation, 44, 432–456.
3. Ambrose, B. W., Conklin, J., & Yoshida, J. (2016). Credit rationing, income exaggeration and adverse selection in the mortgage market. Journal of Finance., 71(6), 2637–2686.
4. An, X., & Cordell, L. (2021). Mortgage loss severities: What keeps them so high? Real Estate Economics, 49, 809–842.
5. An, X., Deng, Y., & Gabriel, S. A. (2021). Default option exercise over the financial crisis and beyond. Review of Finance, 25(1), 153–187.