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

By Giovanni Dell'Ariccia, Luc Laeven, Deniz O Igan

April 1, 2008

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Giovanni Dell'Ariccia, Luc Laeven, and Deniz O Igan. Credit Booms and Lending Standards: Evidence From the Subprime Mortgage Market, (USA: International Monetary Fund, 2008) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper links the current sub-prime mortgage crisis to a decline in lending standards associated with the rapid expansion of this market. We show that lending standards declined more in areas that experienced larger credit booms and house price increases. We also find that the underlying market structure mattered, with entry of new, large lenders triggering declines in lending standards by incumbent banks. Finally, lending standards declined more in areas with higher mortgage securitization rates. The results are consistent with theoretical predictions from recent financial accelerator models based on asymmetric information, and shed light on the relationship between credit booms and financial instability.

Subject: Credit booms, Financial institutions, Housing prices, Loans, Money, Mortgages, National accounts, Personal income, Prices

Keywords: Credit boom, Credit booms, Denial rate, Financial accelerators, Housing prices, Lending standard, Lending standards, Loans, Market share, Moral hazard, Mortgages, Personal income, Subprime loans, Subprime market, Subprime mortgage lender, Subprime mortgage market, WP

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2008/106
Stock No:

WPIEA2008106
ISBN:

9781451869675
ISSN:

1018-5941

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