A Simple Model of Subprime Borrowers and Credit Growth
17 Pages Posted: 4 Feb 2016 Last revised: 30 Aug 2017
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A Simple Model of Subprime Borrowers and Credit Growth
A Simple Model of Subprime Borrowers and Credit Growth
A Simple Model of Subprime Borrowers and Credit Growth
Date Written: 2016-02-01
Abstract
The surge in credit and house prices that preceded the Great Recession was particularly pronounced in ZIP codes with a higher fraction of subprime borrowers (Mian and Sufi 2009). We present a simple model of prime and subprime borrowers distributed across geographic locations, which can reproduce this stylized fact as a result of an expansion in the supply of credit. Owing to their low incomes, subprime households are constrained in their ability to meet interest payments and hence sustain debt. As a result, when the supply of credit increases and interest rates fall, they take on disproportionately more debt than their prime counterparts, who are not subject to that constraint.
Keywords: home prices, housing boom, household debt, credit supply, collateral constraints
JEL Classification: E21, E44, G21
Suggested Citation: Suggested Citation