Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market

G. Dell’Ariccia, D. Igan, L. Laeven

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Abstract

This paper links the current subprime mortgage crisis to a decline in lending standards associated with the rapid expansion and changes in the structure of this market. We show that lending standards declined more in areas that experienced faster credit growth. We also find that the entry of new lenders contributed to the decline in lending standards. The results are robust to controlling for house price appreciation, mortgage securitization, and other economic fundamentals, and to several robustness tests controlling for endogeneity. The results are consistent with the predictions of recent models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.
Original languageEnglish
Place of PublicationTilburg
PublisherFinance
Number of pages44
Volume2009-46 S
Publication statusPublished - 2009

Publication series

NameCentER Discussion Paper
Volume2009-46 S

Keywords

  • credit boom
  • lending standards
  • mortgages
  • subprime loans
  • moral hazard
  • financial accelerators

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