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Working Paper 2008-036D

"Where’s the Smoking Gun? A Study of Underwriting Standards for US Subprime Mortgages"
by Geetesh Bhardwaj, and 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 little 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 the mortgage had been originated 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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Category > Applied Microeconomics
Category > Finance
Author > Rajdeep Sengupta
Research Papers and Publications: JEL Code > G21
Research Papers and Publications: JEL Code > D82
Research Papers and Publications: JEL Code > D86