Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market

54 Pages Posted: 9 Jun 2008

See all articles by Giovanni Dell'Ariccia

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2008

Abstract

This paper studies the relationship between the recent boom and current delinquencies in the subprime mortgage market. Specifically, we analyze the extent to which this relationship can be explained by a decrease in lending standards that is unrelated to improvements in underlying economic fundamentals. We find evidence of a decrease in lending standards associated with substantial increases in the number of loan applications. We also find that the underlying market structure of the mortgage industry mattered, with larger declines in lending standards being associated with increases in the number of competing lenders. Finally, increased ability to securitize mortgages appears to have affected lender behaviour, with lending standards experiencing greater declines 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 some light on the underlying causes and characteristics of the current crisis in the subprime mortgage market.

Keywords: credit boom, financial accelerators, lending standards, moral hazard, mortgages, subprime loans

JEL Classification: E51, G21

Suggested Citation

Dell'Ariccia, Giovanni and Igan, Deniz and Laeven, Luc A., Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market (February 2008). CEPR Discussion Paper No. DP6683, Available at SSRN: https://ssrn.com/abstract=1141005

Giovanni Dell'Ariccia (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Deniz Igan

International Monetary Fund (IMF) - Financial Studies Division ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
56
Abstract Views
7,483
rank
6,433
PlumX Metrics