Mortgage Default Option Mispricing and Procyclicality

This paper addresses the expansion and performance of non-standard mortgage lending products to better understand the impact of such products on borrowers and the financial system. We show that ex ante measured credit risk of these instruments increased and this risk was mispriced. We also examine why the expanded lending box did not increase homeownership rates in the bubble years 2004 to 2007. We conclude with policy implications.

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