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Credit Booms and Lending Standards: Evidence From The Subprime Mortgage Market

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  • Dell''Ariccia, Giovanni
  • Igan, Deniz
  • Laeven, Luc

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6683.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6683

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

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