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Credit Growth and the Financial Crisis: A New Narrative

Listed author(s):
  • Albanesi, Stefania
  • De Giorgi, Giacomo
  • Nosal, Jaromir

A broadly accepted view contends that the 2007-09 financial crisis in the U.S. was caused by an expansion in the supply of credit to subprime borrowers during the 2001- 2006 credit boom, leading to the spike in defaults and foreclosures that sparked the crisis. We use a large administrative panel of credit file data to examine the evolution of household debt and defaults between 1999 and 2013. Our findings suggest an alternative narrative that challenges the large role of subprime credit in the crisis. We show that credit growth between 2001 and 2007 was concentrated in the prime segment, and debt to high risk borrowers was virtually constant for all debt categories during this period. The rise in mortgage defaults during the crisis was concentrated in the middle of the credit score distribution, and mostly attributable to real estate investors. We argue that previous analyses confounded life cycle debt demand of borrowers who were young at the start of the boom with an expansion in credit supply over that period. Moreover, a positive correlation between the concentration of subprime borrowers and the severity of the 2007-09 recession found in previous research may be driven by the high prevalence of young, low education, minority individuals in zip codes with large subprime population.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 12230.

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Date of creation: Aug 2017
Handle: RePEc:cpr:ceprdp:12230
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  1. Virgiliu Midrigan & Elena Pastorino & Patrick Kehoe, 2014. "Debt Constraints and Unemployment," 2014 Meeting Papers 1118, Society for Economic Dynamics.
  2. Veronica Guerrieri & Guido Lorenzoni, 2011. "Credit Crises, Precautionary Savings, and the Liquidity Trap," NBER Working Papers 17583, National Bureau of Economic Research, Inc.
  3. Iacoviello, Matteo, 2004. "Consumption, house prices, and collateral constraints: a structural econometric analysis," Journal of Housing Economics, Elsevier, vol. 13(4), pages 304-320, December.
  4. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  5. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, Oxford University Press, vol. 124(4), pages 1449-1496.
  6. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: Further Evidence," NBER Working Papers 21320, National Bureau of Economic Research, Inc.
  7. Donghoon Lee & Wilbert Van der Klaauw, 2010. "An introduction to the FRBNY Consumer Credit Panel," Staff Reports 479, Federal Reserve Bank of New York.
  8. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class," NBER Working Papers 20848, National Bureau of Economic Research, Inc.
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