Credit booms and lending standards: Evidence from the subprime mortgage market

G. Dell’Ariccia, D. Igan, L. Laeven

Research output: Contribution to journalArticleScientificpeer-review

176 Citations (Scopus)

Abstract

This paper links the U.S. subprime mortgage crisis to demand-side factors that contributed to the rapid expansion of the U.S. mortgage market. We show that denial rates were relatively lower in areas that experienced faster credit demand growth and that lenders in these high-growth areas attached less weight to applicants’ loan-to-income ratios. The results are robust to controlling for supply-side factors, including house price appreciation, mortgage securitization, and other economic fundamentals, and to several robustness tests controlling for endogeneity. The results are consistent with the notion that a relaxation of lending standards, triggered by an increased demand for loans, contributed to the boom and the ensuing crisis, together with other supply-side explanations. These findings shed new light on the relationship between credit booms and financial instability.
Original languageEnglish
Pages (from-to)367-384
JournalJournal of Money, Credit and Banking
Volume44
Issue number2-3
Publication statusPublished - 2012

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