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Working Papers

Credit scoring technology and regime transitions in the non-prime mortgage market

(2024)

Jaime Luque

We develop an equilibrium model in which credit scoring technology (CST) reshapes the structure of the non-prime mortgage market. The model features two lending channels – port- folio lenders (PLs), which use soft information and hold loans, and originate-to-distribute (OTD) lenders, which rely on hard information and sell loans to secondary markets. As CST precision improves, the market transitions across three regimes: PL dominance, coexistence, and OTD dominance. These shifts arise endogenously through belief updating and borrower sorting. We illustrate the model’s implications using a numerical example that maps regime transitions to stylized periods of the subprime boom.

non-prime mortgage supply, credit scoring technology, originate-to- distribute, hard and soft information, homeownership.

Economic Theory, Finance and Urban Studies and Planning

February, 2024

https://ssrn.com/abstract=4740052 or http://dx.doi.org/10.2139/ssrn.4740052

Jaime Luque. "The Credit Scoring Technology Channel of the Suprime Mortgage Market". (2024)
Available at: http://works.bepress.com/luque/18/

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