Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market
CentER Discussion Paper Series No. 2009-46S
44 Pages Posted: 4 Mar 2008 Last revised: 16 Jun 2009
Date Written: January 1, 2009
This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.
Keywords: credit boom, lending standards, mortgages, subprime loans, moral hazard, financial accelerators
JEL Classification: G21, E51
Suggested Citation: Suggested Citation