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The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market
Author(s) -
AGARWAL SUMIT,
AMBROSE BRENT W.,
CHOMSISENGPHET SOUPHALA,
LIU CHUNLIN
Publication year - 2011
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2011.00390.x
Subject(s) - underwriting , equity (law) , business , portfolio , home equity , actuarial science , process (computing) , finance , computer science , political science , law , operating system
Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post .