Subprime lending: An investigation of economic efficiency

Abstract

Subprime lending, a fast‐growing and controversial segment of the mortgage market, remains unevenly studied and poorly understood. Relying principally on a survey conducted for Freddie Mac by the Gallup Organization, we provide an overview of subprime lending, characterize the types of borrowers in this market segment, and assess the service they receive from lenders. We find that subprime borrowers generally are higher‐risk than their prime counterparts and pay higher rates and fees for their mortgages. They are disproportionately minority and lower income, older, less well educated, less financially sophisticated, and less likely to search for the best interest rate when applying for a mortgage. We use three measures to assess the efficiency of the subprime market. Although none of them is conceptually conclusive, and each has its flaws of execution, all three suggest that concerns over the relative efficiency of the subprime market may be warranted.

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