CreditBoomsandLendingStandardsEvidencefromthe.ppt

Asset Securitization Recent work shows that asset securitization (e.g., Keys et al., 2007; Mian and Sufi, 2007) helped fuel the subprime crisis Effects of increased recourse to securitization Decreased incentives to monitor Augment model with proportion of loans sold within 1 year Distinguish between earlier and later periods as securitization became more relevant in the second half of the sample While increased recourse to securitization contributed to the decline in denial rates, our main results are robust Effect of Loan Sales Dependent variable: Denial rate Subprime House price appreciation -0.269*** Average income -0.002 Income growth 0.096 Unemployment 0.004* Self employment -0.271** Log population -0.256*** Log number of competitors -0.057*** Log number of applications -0.032*** Proportion of loans sold -0.123*** Prop. loans sold * Year≥2004 -0.110*** Constant 4.444*** R-squared 0.45 Summary of Findings (I) Credit expansion in subprime mortgage market led to a decrease in lending standards As measured by a decline in application denial rates and a significant increase in loan-to-income ratios not explained by changes in underlying economic fundamentals Denial rates declined more and loan-to-income ratios rose more in areas where the number of loan applications rose faster These areas subsequently experienced a sharper increase in delinquency rates, in a pattern reminiscent of boom-bust cycles in emerging markets (e.g., Sachs, Tornell, and Velasco, 2006; Caballero and Krishnamurthy, 2006) Results shed light on relationship between booms and crises Lend support to recent asymmetric information based theories Summary of Findings (II) Changes in market structure affected lending standards Denial rates declined more in areas with more competitors: incumbents’ lending standards were negatively affected by the entry into local markets of new financial institutions We interpret this as evidence that local lenders were “forced” to cut lending standards when facing co