Working Paper: CEPR ID: DP6683
Authors: Giovanni Dell'Ariccia; Deniz Igan; Luc Laeven
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 Codes: E51; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| rapid growth in subprime loan volume (G21) | decrease in denial rates on subprime loan applications (G21) |
| rapid growth in subprime loan volume (G21) | increase in loan-to-income ratio (G21) |
| increase in loan applications (G21) | reduction in lending standards (G21) |
| current mortgage delinquencies (G21) | past credit growth (N13) |
| denial rates (G22) | number of loan applications (G51) |
| lending standards (G21) | market conditions (P42) |
| credit expansion (E51) | decline in lending standards in subprime market (G21) |