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Where’s the Smoking Gun? A Study of Underwriting Standards for US Subprime Mortgages

By Geetesh Bhardwaj Y and Rajdeep Sengupta Zx


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 …nd no 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 signi…cantly lower ex post default if they were to be given a loan 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

Topics: JEL Codes, G21, D82, D86. Keywords, mortgages, subprime, underwriting, crisis. Thanks to Mara Faccio, Gary Gorton, Geert Rouwenhorst and Dave Wheelock for their comments and suggestions on an earlier draft of this p
Year: 2008
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