Housing Finance Working Paper Series
HF-016 Are Rejected Households Credit-Constrained Or Simply Less Creditworthy?, July 2002.
This paper re-examines consumer participation in credit
markets looking specifically at issues related to the market
treatment of borrowers of different credit risk. The traditional
credit-rationing literature describes some borrowers as being
"credit-constrained" as a result of creditors not
being able to determine their future income prospects. However,
this paper presents evidence that most rejected borrowers
have experienced delinquency problems in the past year and/or
filed for bankruptcy; therefore, rejected borrowers are often
of lower credit quality. Furthermore, a substantial amount
of credit has been made available over the past few years,
and the lending industry has developed credit and mortgage
scoring techniques that allow it to price the credit risk
of individual borrowers. As a result, credit has been made
to risky borrowers although they must pay higher prices for
it. The analysis also shows that creditworthy minorities are
not more likely to pay unusually high loan rates. Finally,
borrowers that are considered to be creditworthy yet still
pay high interest rates are also the ones who report they
do little shopping for a loan. In addition to mortgage credit,
automobile and revolving credit markets are also analyzed
in this study.
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