Journal of Real Estate Finance and Economics, 29:4, 365±392, 2004
# 2004 Kluwer Academic Publishers. Manufactured in The Netherlands.
Subprime Borrowers: Mortgage Transitions and
MARSHA J. COURCHANE
BRIAN J. SURETTE
PETER M. ZORN
Public policy concerns increasingly have focused on subprime lending. Our research uses a survey of prime and
subprime borrowers to address whether borrowers ``inappropriately'' are channeled to the subprime segment, if
once having taken out a subprime mortgage borrowers are ``stuck'' in this market segment, and whether
borrowers face higher costs by taking out subprime mortgages.
We ®nd that subprime borrowers are less knowledgeable about the mortgage process, are less likely to search
for the best mortgage rates, and are less likely to be offered a choice among alternative mortgage terms and
instrumentsÐpossibly making them more vulnerable to unfavorable mortgage outcomes. Our analysis of market
segmentation con®rms that typical mortgage underwriting criteria are most important in explaining whether
borrowers obtain prime or subprime mortgagesÐhigher credit risk borrowers are more likely to get a subprime
loan. Our results further show that search behavior and other demographic factors including adverse life events,
age, and Hispanic ethnicity contribute to explaining market segment, suggesting that borrowers may
inappropriately receive subprime mortgages. While we ®nd some persistence to market segmentÐborrowers
are more likely to take out a subprime mortgage if their previous mortgage came from the subprime segmentÐwe
also ®nd that market segment is not immutable.
Analysis of the survey responses indicates that borrowers with subprime mortgages signi®cantly are more
dissatis®ed with their mortgage outcomes. This is not surprising because subprime borrowers look worse across
typical mortgage underwriting criteria. Consistent with policy concerns, however, despite holding constant these
and other factors, taking out a mortgage in the subprime segment, by itself, appears to increase dissatisfaction
with mortgage outcomes.
Wedo not providea de®nitive answer tothe question of whether subprime lending, on balance, serves homebuyers
well by providing access to mortgage credit to those otherwise constrained, or rather serves homebuyers poorly by
inappropriately assigning them to a market where costs are high and the ability to transition to more attractive
prime mortgages remains low. Our analysis, however, does provide some empirical support for concerns raised by
critics of subprime lending, and for this reason justi®es continued public policy debate and analysis.
Key Words: subprime lending, mortgage markets