The “New Normal” in Mortgage Lending and Its Impact on Default Probabilities

The paper analyses the evolution of the use of subprime loans and the availability of credit to different classes of borrowers. It examines the time period from 1980 to 2008 as a whole, as well as the changes in credit profiles in five sub-periods. By tracking borrower characteristics and their impact on foreclosure probability over time it determines what went wrong and how policy can be developed that prevents a repeat of the housing crisis that began at the end of 2006. The findings suggest that over the sample period debt to income, FICO score and loan-to-value are significant determinants for the probability of foreclosure and their importance increases over time. Furthermore, some borrowers are three times more likely to default on a loan originated between 2001 and 2006 than a loan originated between 1980 and 1994 indicating a distinct difference in lending terms and the general lending environment over time.