An essential part associated with modification happens to be the increase for the “subprime” market, described as loans with a high default prices, dominance by specific subprime loan providers in the place of full-service loan providers, and small coverage because of the additional mortgage market. In this paper, we evaluate these as well as other “stylized facts” with standard tools utilized by economic economists to explain market framework in other contexts. We utilize three models to look at market framework: an option-based approach to mortgage pricing for which we argue that subprime choices are not the same as prime choices, causing various agreements and rates; as well as 2 models predicated on asymmetric information–one with asymmetry between borrowers and loan providers, plus one utilizing the asymmetry between lenders plus the secondary market. Both in regarding the asymmetric-information models, investors put up incentives for borrowers or loan vendors to primarily reveal information through expenses of rejection.
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