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Where's the smoking gun? a study of underwriting standards for US subprime mortgages

  • Geetesh Bhardwaj
  • Rajdeep Sengupta

The dominant explanation for the meltdown in the US subprime mortgage market is that lending standards dramatically weakened after 2004. Using loan-level data, we examine underwriting standards on the subprime mortgage originations from 1998 to 2007. Contrary to popular belief, we find no evidence of a dramatic weakening of lending standards within the subprime market. We show that while underwriting may have weakened along some dimensions, it certainly strengthened along others. Our results indicate that (average) observable risk characteristics on mortgages underwritten post-2004 would have resulted in a significantly lower ex post default if they were to be given a loan in 2001 or 2002. We show that while it is possible that underwriting standards in this market were poor to begin with, deterioration in underwriting post-2004 cannot be the explanation for collapse of subprime mortgage market.

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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-036.

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Date of creation: 2008
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Handle: RePEc:fip:fedlwp:2008-036
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  1. Jun Chen & Yongheng Deng, 2003. "Commercial Mortgage Workout Strategy and Conditional Default Probability: Evidence from Special Serviced CMBS Loans," Working Paper 8614, USC Lusk Center for Real Estate.
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  14. Pierre-André Chiappori & Bruno Jullien & Bernard Salanié & François Salanié, 2002. "Asymmetric Information in Insurance : General Testable Implications," Working Papers 2002-42, Centre de Recherche en Economie et Statistique.
  15. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-74, May.
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