Risk Heterogeneity and Credit Supply: Evidence from the Mortgage Market
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This paper uses data on about 600,000 mortgage contracts to estimate a credit supply function that allows for heterogeneity in risk pricing. The results for the period 1975-2005 are suggestive of significant price heterogeneity with riskier borrowers increasingly penalized for borrowing more. A sub-sample analysis, however, reveals that the period before the financial crisis was characterized by a sharp fall in risk pricing and little evidence of heterogeneity, consistent with a relaxation of credit conditions.
Paolo Surico gratefully acknowledges financial support from the European Research Council (ERC) Starting Independent Grant - Agreement 263429.
This work was started while I was a member of the Bank of England Monetary Policy Committee.