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Working Paper 2008-036C

"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 U.S. subprime mortgage market is that lending standards dramatically weakened after 2004. Using loan-level data, we examine underwriting standards on securitized 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 after 2004 would have resulted in a significantly fewer ex post defaults if such mortgages had 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 after 2004 cannot be the dominant explanation for the collapse of the subprime mortgage market.

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Category > Finance
Category > Applied Microeconomics
Author > Rajdeep Sengupta
Research Papers and Publications: JEL Code > G21
Research Papers and Publications: JEL Code > D82
Research Papers and Publications: JEL Code > D86