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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
Date of revision:
Handle: RePEc:fip:fedlwp:2008-036
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  1. Christopher J. Mayer & Karen Pence, 2008. "Subprime Mortgages: What, Where, and to Whom?," NBER Working Papers 14083, National Bureau of Economic Research, Inc.
  2. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," CEMA Working Papers 595, China Economics and Management Academy, Central University of Finance and Economics.
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  12. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56.
  13. Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Did prepayments sustain the subprime market?," Working Papers 2008-039, Federal Reserve Bank of St. Louis.
  14. Ciochetti, Brian A, et al, 2003. "A Proportional Hazards Model of Commercial Mortgage Default with Originator Bias," The Journal of Real Estate Finance and Economics, Springer, vol. 27(1), pages 5-23, July.
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  17. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis.
  18. Brian A. Ciochetti & Yongheng Deng & Bin Gao & Rui Yao, 2002. "The Termination of Commercial Mortgage Contracts through Prepayment and Default: A Proportional Hazard Approach with Competing Risks," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(4), pages 595-633.
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