The end of no income, no assets, no problem:

An empirical analysis of subprime mortgage

underwriting standards during the credit crunch

Nick Huber1
March 19, 2009

Harvard College
Cambridge, Massachusetts

Abstract

This paper analyzes subprime mortgage underwriting standards using data on 373,206 mortgage offers to
8123 borrowers from 56 lenders between January 31, 2007 and May 30, 2008. My results identify four trends in
underwriting standards by decomposing the determinants of credit spreads and underwriting limits by borrower
characteristics, lender characteristics, time and geography in a form that approximates lender rate sheets. First,
lenders were more sensitive to risk factors related to house prices and less sensitive to risk factors related to
ability to repay for subprime borrowers as compared to prime borrowers. Second, lenders that were owned by
investment banks and lenders that imploded were looser across the board and likely lending more than other
lenders. Third, lenders became much tighter from January 2007 to May 2008. Fourth, lenders did not have
meaningfully different underwriting standards across the country. In terms of contemporary theories on causes
of the increase in foreclosures by subprime borrowers, these results are new evidence in support of both the
originate-to-distribute hypothesis and the house price appreciation hypothesis, but also caveat the originate-to-
distribute hypothesis. To my knowledge, this is the first paper in the literature to directly analyze recent trends
in subprime mortgage underwriting standards using data on the supply of mortgage credit.

1I would like to thank my thesis advisor John Campbell, Paul Willen, Andreas Fuster, Mark Junod, Erkko Etula and Laura Serban for
their helpful comments and suggestions. I am particularly indebted to Andreas Fuster for tirelessly answering my many questions
and to the Federal Reserve Bank of Boston for my data.
 1 Introduction

From 2007 to the present, house prices have declined by at least 20% in most areas of the country and as

much as 40% in others, an estimated 2.5 million homeowners have defaulted on their mortgages, subprime

mortgage origination has gone from $600 billion annually to essentially nothing, 350 major US lending

operations have shut down and world governments have collectively spent trillions of dollars in hopes of fixing

the financial system. Though the financial crisis has had far-reaching consequences for consumers,

homeowners, investors and governments, it is still unclear how and why the mortgage market – the epicenter of

financial contagion – failed so dramatically. Were lenders simply underwriting nonsensical mortgages as is

suggested in Figure 1? If so, why? Further, how if at all were these low underwriting standards responsible for

the recent increase in foreclosures?

1.1 A tale of two hypotheses

There are main, non-mutually exclusive explanations for the recent increase in defaults on mortgages to

subprime borrowers, the originate-to-distribute hypothesis (hereafter, the O-to-D hypothesis) and the house

price appreciation hypothesis (hereafter, the HPA hypothesis).

The O-to-D hypothesis is that increased mortgage securitization by lenders undermined their underwriting

standards by allowing them to both transfer and obfuscate credit risk to secondary investors. Proponents of the

O-to-D hypothesis argue that subprime lenders were agents in the familiar principal-agent framework because,

unlike traditional lenders, they rapidly sold the mortgages they originated through securitized products, which

lowered their underwriting standards because they originated mortgages with little to no ownership interest in

the likelihood that they would ultimately be repaid. The O-to-D hypothesis also claims that these lower

underwriting standards caused house price increases in certain areas of the country where securitization was the

most prolific, which subsequently fueled a cycle of lower underwriting standards and further house price

increases that ultimately created regional housing bubbles.

The HPA hypothesis is that unforeseen declines in house prices caused the increase in foreclosures on

subprime mortgages because highly leveraged borrowers rationally defaulted when they had negative equity (the

value of their mortgage was greater than the value of their house) and could no longer afford their monthly

payments. Proponents of the HPA hypothesis argue that both of these conditions are necessary for a default to

occur because borrowers that have negative equity but can afford their monthly payments typically continue

paying their mortgages and borrowers that cannot afford their monthly payments but have positive equity
simply sell their house. In this vein of logic, the HPA hypothesis claims that subprime borrowers defaulted at

significantly higher rates because they both tended to buy houses with less equity cushion, which turned

everyday unexpected life events into mortgage defaults when house prices fell enough, and they typically could

only afford their monthly payments for a short period of time, which forced them to quickly refinance after

origination when house prices had risen so that they lower their cost of borrowing. Unlike the O-to-D

hypothesis, the HPA hypothesis is not fundamentally grounded in a theory on underwriting standards, but its

central claim that the default rate of subprime borrowers is more sensitive to declines in house prices than prime

borrowers has testable implications with respect to underwriting standards, particularly if lenders acknowledged

this sensitivity in the type of mortgages they were willing to give subprime borrowers.

1.2 My contribution

My results identify four trends in underwriting standards in the subprime mortgage market as measured by

credit spreads and underwriting limits that provide new evidence in support of both hypotheses, but also caveat

the O-to-D hypothesis, using data on 373,206 mortgage offers to 8123 borrowers from 56 lenders from January

31, 2007 to May 30, 2008. First, in support of the HPA hypothesis, lenders were more sensitive to risk factors

related to house prices and less sensitive to risk factors related to ability to repay for subprime borrowers as

compared to prime borrowers, which is evidence that their credit risk was largely their sensitivity to house

prices. Second, in support of the O-to-D hypothesis, lenders that were owned by investment banks and lenders

that imploded were looser across the board and likely lending more than other lenders, which indicates that

securitization may have lowered their underwriting standards. Third, consistent with both hypotheses, lenders

became much tighter from January 2007 to May 2008 as both the market for mortgage-backed securities dried

up and house prices plummeted around the country. Fourth, as a caveat to the O-to-D hypothesis, lenders did

not have meaningfully different underwriting standards across the country, which is evidence that low

underwriting standards did not fuel regional housing bubbles. Collectively, this suggests a new role of

underwriting standards in the increase in foreclosures by subprime borrowers, namely lenders allowed

borrowers to buy houses even though their ability to repay was largely contingent on house prices but also did

not moderate their underwriting standards in the face of nonsensical house prices. To my knowledge, this is the

first paper in the literature to directly analyze recent trends in subprime mortgage underwriting standards using

data on the supply of mortgage credit.

 This paper is organized as follows: Section 2 provides a brief literature review on the theoretical

determinants of credit risk, important evidence to date for the two hypotheses and recent surveys of mortgage

underwriting standards. Section 3 describes how lender rate sheets generate my data, discusses summary

statistics and addresses several immediate concerns with the data. Section 4 outlines my empirical specification

that estimates the determinants of an offer’s credit spread and underwriting limits in a form that approximates

lender rate sheets. Section 5 presents the evidence for my four results by decomposing credit spreads and

underwriting limits by borrower characteristics, lender characteristics, time and geography. Section 6 shows

that these industry-wide trends also apply to the set of offers that borrowers were most likely to accept. Section 7

concludes.

2 Literature Review

This paper brings together three chains of research: the theoretical determinants of credit risk, the causes of

the recent rise in foreclosures by subprime borrowers and trends in mortgage underwriting standards.

2.1 Credit risk

Determining credit risk is one of the most contentious problems in finance. In particular, uncertainty about

the future makes it very difficult to quantify the appropriate cost a lender should charge a borrower for

providing debt financing. The problem is further complicated when such financial arrangements provide the

borrower with real options as most US residential mortgages do in allowing homeowners to prepay or default on

their mortgages at any time by simply refinancing or leaving the house, respectively. Gordy (1998) presents an

overview of modeling credit risk, particularly competing-risk hazard models that incorporate the optionality of a

mortgage contract by estimating the probabilities of different discrete mortgage outcomes (prepayment, default

or full repayment) and shows that under fairly unrestrictive conditions the interest spread over the risk-free rate

charged by a lender will incorporate all observed borrower risk characteristics. Using this result, this paper will

decompose the determinants of a mortgage offer’s credit spread as a key metric of lender underwriting

standards as their compensation for assuming credit risk.

2.2 Evidence for the two hypotheses2

2These are by no means the only papers to find support for the O-to-D or the HPA hypotheses, but they are the most thorough and
most frequently cited ones. For an excellent overview of others, see Gorton (2008).
 Mian and Sufi (2008) present the strongest evidence to date for the O-to-D hypothesis. By combining zip-

code level data on community credit characteristics from 1991 to 2007 with data on the flow of mortgage

originations and house prices over the same period, they show that the increase in the supply of mortgage credit

from 2001 to 2005 as measured by a decrease in mortgage denial rates was concentrated in zip codes with

previously high denial rates. Most importantly, during this period, these zip codes experienced increases in

mortgage securitization and house prices, despite the fact that they simultaneously experienced negative relative

income and employment growth, which they believe to be caused by increases in mortgage credit to less

creditworthy borrowers due to the misaligned incentives created by securitization. However, a community-level

denial rate is an imperfect measure of the flow of credit as it does not capture individual borrower characteristics

or the lender’s compensation for underwriting credit risk, unlike a mortgage’s credit spread. Further, their

specification only has limited controls for increases in housing demand so the increase in house prices that they

link to increases in credit due to securitization could in fact be driven by unobserved housing demand factors.

This paper addresses both concerns because it uses data on mortgage offers from lenders which can estimate

trends in credit supply unconditional on changes in housing demand and also more directly test if lenders that

securitized more had lower underwriting standards.

Foote, Gerardi, Goette and Willen (2007) make the strongest case to date for the HPA hypothesis by

showing that the main determinant of foreclosures in all homeownership experiences in Massachusetts from

1987 to 2007 was declines in house prices and that the default rates of subprime borrowers were 10 times more

sensitive to house prices than prime borrowers. Similarly, Gerardi, Lehnert, Sherlund and Willen (2008) show

that it was possible to determine the sensitivity of subprime borrowers to house prices using mortgage

performance data available in 2004. Indeed, they show that the unexpected losses on mortgage-backed

securities were likely not driven by a underestimation of subprime borrowers’ sensitivity to house prices, but

rather a gross overestimation of the future path of house prices, using data from investment bank analyst

reports. However, because both papers use data on observed mortgage originations rather than on the supply of

mortgage credit, it is still unclear how if at all this sensitivity was incorporated in underwriting standards in the

mortgage industry, which this paper concretely estimates.

2.3 Underwriting standards

 Each hypothesis’s unanswered empirical claims are related to lender underwriting standards. In fact, the

question of whether underwriting standards declined or not over the past 10 years is still quite controversial

contrary to conventional wisdom.

Gerardi, Lehnert, Sherlund and Willen argue that underwriting standards declined from 2001 to 2007 using

nationally representative data from mortgage-backed securities. In particular, they show that the share of

mortgages with loan-to-value ratios greater than 90% increased from 10% to 50%, the share with no

documentation of borrower income increased from 20% to 35% and the respective shares with non-traditional

amortization schedules and to borrowers with credit scores less than or equal to 620 both increased slightly.

Contrastingly, using the same data, Bhardwaj and Sengupta (2008) argue that underwriting standards

actually improved within the subprime market. They show that mortgages to borrowers with bad credit

characteristics (no documentation of income, high loan-to-value ratio, high house price or non-owner occupied

home) were offset by more good credit characteristics (principally, a better credit score) over time that were

consistently predictive of lower delinquency and default rates. In fact, they estimate that a typical mortgage

originated from 2005 to 2007 would have performed significantly better than a typical mortgage from 2001 to

2002 if it had been originated then and benefited from the enormous nationwide house price appreciation from

2002 to 2005.

However, both papers’ estimates of trends in underwriting standards are problematic. Their data only

observes mortgages that were securitized, which could differ meaningfully from the mortgages that lenders

decided to keep on their own balance sheets. Further, their data cannot identify individual lenders to test how

underwriting standards differ across different types of lenders. This is a particularly large omission as in their

survey of the mortgage market, Temkin, Johnson and Levy (2002) find that subprime underwriting standards

vary greatly across lenders, which they link to the limited role of government-sponsored entities in securitizing

and therefore standardizing subprime mortgages. In contrast, my data both observes all mortgage offers

regardless of if the originated mortgage was going to be securitized and can identify individual lenders to see if

underwriting standards were common across the industry. Ultimately, both papers explicitly acknowledge that

the best way to estimate trends in underwriting standards is with direct data on lender rate sheets and mortgage

offers, which to date has been unavailable.

3 Data
 My data is from LoanSifter, an enterprise software product used by mortgage brokers that searches lender

rate sheets to match borrowers with mortgages they qualify for based on their credit characteristics.3 The

LoanSifter data (hereafter, the LS data) includes 373,206 offers to 8123 borrowers from 56 lenders from January

31, 2007 to May 30, 2008. Borrowers appear in the LS data when they come to one of the 2000 mortgage

brokers around the country who uses the LoanSifter software. On the other hand, lenders’ mortgage offers

appear in the LS data if the lender has agreed to publish its rate sheets through the software. With an average of

70 mortgage offers per borrower, the LS data has remarkable variation in the mortgages that different lenders

were willing to give to the same borrower. Though neither the borrower or lender selection mechanisms is

random, I will argue that the LS data is representative of the subprime mortgage market.

3.1 Rate sheets

The LS data is generated from lender rate sheets, which are how lenders define all mortgage offers that they

are willing to give borrowers with different credit characteristics. Individual lenders use different credit risk

models to determine what types of mortgages they are willing to underwrite so the structure and content of rate

sheets vary meaningfully. Rate sheets are frequently updated once or twice a day as interest rates and the

general credit market fluctuate and large lenders commonly have different rate sheets for borrowers in different

regions of the country.

Figure 2 is an example rate sheet from Option One Mortgage for March 7, 2007 for borrowers in the

Western United States.4 In order to determine the mortgage terms Option One is willing to give a certain

borrower, his credit characteristics must be inputted into the rate sheet. A borrower’s income documentation

first places him in either the “Full Doc” or “Stated Income” column. As would be expected, Option One charges a

higher interest rate to borrowers who do not offer income documentation as can be seen by comparing the rates

in the two columns elementwise. Then, the lender’s proprietary credit model assigns him a grade, which places

him vertically in a matrix. In practice, this is largely dependent on how many late mortgage payments he has on

his credit record over the last year.5 In this case, borrowers with no 30-day late payments within the last year are

automatically placed in the top “AA+” grade as is indicated by the “0x30” subtext. Again, a lower credit grade

implies a higher interest rate as can be seen comparing the rates in the different matrices elementwise. Next, a

borrower’s credit score (the vertical axis within the matrix) and his loan-to-value ratio (the horizontal axis)

3 To learn more about LoanSifter, visit www.loansifter.com.

4 Specifically, for borrowers in California, Hawaii, Oregon, Nevada, Idaho, Montana, Wyoming, Utah, Colorado, Arizona and Alaska
as is listed on the top of the rate sheet.
5 See Alexander, Grimshaw, McQueen and Slade (2002).
determine a borrower’s baseline mortgage rate. Finally, the rightmost Pricing Adjustments column determines

any last adjustments to this baseline rate to account for additional factors that affect his credit risk in the eyes of

Option One, such as wanting a $750,000 or larger mortgage (a 25 basis point increase), wanting a mortgage

with certain features like interest-only monthly payments (a 25 or 40 basis point increase depending on his

credit score) or being a first-time homebuyer (a 25 basis point increase).6

The matrix at the bottom of the Pricing Adjustments column determines the maximum loan-to-value ratio

that a borrower can have based on his credit grade, income documentation, residency status and mortgage

purpose, which is graphically represented by “grayed-out” cells in the previous matrices for certain loan-to-value

and credit score combinations. Mortgage offers also include other underwriting limits such as the maximum

debt-to-income ratio a borrower can have after origination and the maximum amount a borrower can cash out

in home equity in a subsequent refinancing, but they do not explicitly appear in Figure 2.7 Nearly all rate sheets

are specified in this matrix form to determine a borrower’s baseline interest rate, but the structure of pricing

adjustments and underwriting limits vary between lenders and each lender obviously sets its own rates. For each

borrower, LoanSifter performs this exercise for each rate sheet in its database and returns the set of all

applicable mortgage offers and their relevant terms.

3.2 Variables

I appended a handful of variables to the LS data in order to have a more complete set of controls and

additional levels of variation that did not come directly from borrower searches and lender results. The

additional controls include time-varying yield curve data from the Federal Reserve, time- and region-varying

house price appreciation from the Office of Federal Housing Enterprise Oversight and different constructions of

US geographical regions from the Census Bureau. Data on lender ownership by investment banks comes from

company 10-K filings in the SEC’s EDGAR database. The dates of lender “implosions,” or the first date on which

a lender stops accepting loan applications, fires more than 80% of its workforce or files for bankruptcy, come

from the Mortgage Lender Implode-O-Meter and are cross-checked with Factiva when possible.8

With this data appended, the variables in the LS data can be broken into 7 categories: underwriting

variables (outcomes determined by lenders), credit risk variables (important observed borrower characteristics),

6 One basis point is equal to .01%.

7 A “cash-out” mortgage is when a borrower refinances an existing mortgage with a larger mortgage in order to extract the difference
between the two from home equity as cash.
8 Remarkably, the Mortgage Lender Implode-O-Meter, a tool created by blogger-journalist Aaron Krowne in covering the financial

crisis, is both more accurate in finding the first implosion event and more specific than Factiva in gathering information on many
smaller lenders. It is available online at www.ml-implode.com and averages over 1 million unique monthly visitors as of March 2009
according to QuantCast.
mortgage variables (contractual terms), borrower variables (income profile and credit history), property

variables (house and residency type), lender variables (investment bank ownership and date of implosion) and

global variables (date, geography and the yield curve). Table 1 provides explicit definitions for all variables in the

LS data organized into these categories and any italicized word in this paper.

3.3 Data cleaning

Significant data cleaning was necessary as this paper is the first to use the LS data. I first dropped 15,251

observations because they had extreme, impossible or missing values, the thresholds for which are described in

Table 1. I then dropped 58,671 offers that included adjustable-rate mortgages as the LS data lacks their reset

terms such as the reset index and premium (for example, LIBOR + 500 basis points). Finally, I had to drop

100,778 offers that borrowers could not have accepted as they had a binding maximum debt-to-income ratio

(DTI > Max DTI) or maximum loan-to-value ratio (LTV > Max LTV). This left me with my final sample of

373,206 observations.

3.4 Summary statistics

Table 2 shows borrower-level summary statistics for the 8123 borrowers in the LS data. Fortunately, this

relatively small pool of borrowers contains variation in many dimensions. The median borrower has an average

credit score of 665, $4030 in monthly income, $1110 in monthly non-mortgage interest payments and is looking

for a $181,000 mortgage on a $250,000 house. Of the borrowers in the LS data, 28% would typically be

categorized as “subprime,” 31% do not to provide income documentation, 3% have defaulted on a mortgage in

the past 10 years and 11% are first-time homebuyers. Mortgage purpose and types of residency also vary

significantly between borrowers: 68% of borrowers are applying for a mortgage to purchase a house, 24% are

refinancing an existing mortgage and 7% are converting home equity into cash while 92% of borrowers are

applying for a mortgage on their primary home, 6% on their secondary home and 2% on an investment property.

Table 3 shows offer-level summary statistics for the 373,206 mortgage offers in the sample. Since more

mortgages are available to more creditworthy borrowers, the median offer is to a more creditworthy borrower

than the median borrower in the LS data. For example, the median offer has a lower loan-to-value ratio (50% vs.

80%), is to a borrower with a higher average credit score (693 vs. 665) and has a lower chance of being to a

subprime borrower (14% vs. 28%). The median offer includes a $100,000 mortgage with an interest rate 322

basis points higher than the 10-year Treasury rate and will cause a borrower’s interest coverage ratio or, in

industry terms, his debt-to-income ratio, to go to 36% if it is accepted. The offers also include mortgages with
different types of amortization schedules and prepayment penalties. Though 49% of mortgage offers have

standard amortizing mortgages, 30% only partially amortize and 21% do not amortize at all.9 The majority of

mortgage offers do not have a specified prepayment penalty, but 10% have prepayment penalty periods ranging

from 0 to 4 years thereby affecting a borrower’s real option to refinance at any time.10 The offers also include

information on lender underwriting limits. The median offer allows at most a borrower to have a loan-to-value

ratio of 85, a debt-to-income ratio of 50 and to cash-out $125,000 in home equity in a subsequent refinancing.

Finally, the offers come from different types of lenders: 37% of offers come from lenders owned by investment

banks and 93% come from lenders that imploded, as previously defined.

3.5 Concerns

3.5.1 Borrower representation

The LS data only observes borrowers who use mortgage brokers who tend to be less creditworthy than

borrowers who apply for mortgages directly from lenders; however, the typical borrower in the LS data is

arguably representative of borrowers in the subprime mortgage market.11 Table 4 compares the typical US

consumer to the typical borrower in the LS data, which confirms this bias in the broker mechanism: the median

US consumer has a credit score of 680, an annual income of $63,570 and annual non-mortgage interest

payments of $10,670 whereas the median borrower in the LS data has an average credit score of 665, an annual

income of $48,400 and annual non-mortgage interest payments of $12,470.12 It is also very likely that the typical

borrower in the LS data also has more negative credit events in his past such as bankruptcies, late mortgage

payments and mortgage defaults than the typical US consumer, but there are few detailed nationwide statistics

on such events to empirically verify this.

Though the typical borrower in the LS data is not representative of a typical consumer nationwide, the

experience of less creditworthy borrowers in the mortgage market is of central interest in this paper as they are

responsible for the vast majority of recent foreclosures. Indeed, the differences between the typical US consumer

and the typical borrower in the LS data are largely analogous to the differences between prime and subprime

borrowers. The first column of Table 5 reports borrower-level summary statistics in the LS data divided between

9 Amortization is when a mortgage’s monthly payments repay both interest and principal so that a mortgage’s monthly payments are
constant throughout its life. Mortgages that do not fully amortize defer principal repayment and have lower regular monthly
payments, but also require a large “bullet” payment at the end of the mortgage’s life.
10 The majority of offers do not have a specified prepayment penalty because as discussed in Table 1, the prepayment penalty variable

is a borrower choice variable that limits the offers that LoanSifter returns rather than a variable associated with each mortgage offer.
11 See Woodward (2003).
12 As noted in Table 6, all dollar amounts are in 2007 dollars and rounded to the nearest ten. Also, the annual income figure for the

median borrower in the LS data only includes those borrowers that offer income documentation as the incomes of borrowers who do
not are significantly higher and likely overstated.
subprime and prime borrowers. Compared to prime borrowers, subprime borrowers apply for mortgages with a

4 percentage point higher loan-to-value ratio, have $12,000 less in annual disposable income, have about 4

times as many late mortgage payments on their credit record and are about twice as likely to have declared

bankruptcy or defaulted on a mortgage in the last 10 years.

3.5.2 Lender representation

Similarly, lenders choose to publish their rates with LoanSifter so the LS data does not observe all subprime

lenders; however, again a typical lender in the LS data seems representative of lenders in the subprime mortgage

market. Table 6 compares the 10 largest lenders in the LS data with the 10 largest subprime lenders nationwide

in 2006 at the height of the subprime lending boom. Though some lenders such as New Century and Citi

Residential Lending are not as prominent in the LS data as they are nationwide, 6 of the 10 largest subprime

lenders nationwide are among the top 10 lenders in the LS data and all 10 are included in the LS data.13

3.5.3 Concentration

The LS data is very concentrated in time and space. As would be expected given the recent nationwide

decline in lenders, the number of offers declines precipitously in late 2007 so much so that 90% of the

observations in the LS data occur in the first 8 months, from January 2007 to July 2007.14 Also, 50% of

observations come from Wisconsin, where LoanSifter is headquartered and many brokers use the software.

Because the behavior of the mortgage market over time – and in particular in 2008 – is of central interest and

mortgage offers from Wisconsin represent such a large portion of the data, I choose to leave both groups in my

final sample. However, this concentration raises the concern that an observed borrower in the LS data does not

represent a typical subprime borrower. One problem is that a typical borrower who appears in the data in 2008

could be significantly more creditworthy than one from early 2007 because underwriting standards tightened so

dramatically in this period that a less creditworthy borrower would not bother to even ask their broker for a

mortgage and therefore would not appear in the LS data. Similarly, borrowers from Wisconsin might be

significantly different than those from the rest of the country.

Figures 3 and 4 plot several key borrower and offer variables over time at the borrower-level and offer-level,

respectively. Though the offer-level variables appear to trend to tighter underwriting standards over time

(higher credit spreads, lower underwriting limits), there does not appear to be any similarly noticeable trends in

13 See Table 7 for a full list of lenders in the LS data.

14 Fortunately, 10% of 373,206 is still quite a large number.
the borrower-level variables. The second and third columns of Table 5 report borrower-level summary statistics

divided by time and geography to formally test for statistically significant differences between these subsets of

the LS data. The second column shows that the average borrower that appears in the data before July 2007 is

very similar to the average borrower in the data from July 2007 on. In fact, the only significant difference

between the two groups is that borrowers from July 2007 on are much less likely to apply for a mortgage with

undocumented income than borrowers before July 2007 (23% vs. 36%), which is likely a response to lenders

ending their stated income mortgage programs as the financial crisis worsened. However, this does not

necessarily imply an underlying population shift in a typical borrower between the two time periods because

documenting income is a choice variable for many borrowers not an inherent characteristic like credit score,

income profile or credit history. For example, it is very difficult for self-employed workers and small business

owners to document their income because they do not receive a paycheck and frequently understate their

income when filing their taxes. However, if it became prohibitively expensive to get a mortgage without income

documentation, these borrowers could document their income by reporting their full income in tax returns.

Coupled with the fact that this is the only significant difference between the two groups, it seems likely that this

shift is merely a response to an increased cost of borrowing without income documentation (which will later be

shown) not an underlying population shift between the two time periods.

The third column shows that the average borrower in Wisconsin is significantly less creditworthy than the

average borrower outside of Wisconsin. Wisconsin borrowers tend to apply for mortgages with a 2 percentage

point higher loan-to-value ratio, to have a 16 point lower average credit score and to have around $10,000 less

in annual disposable income. This is likely not due to a real-world difference between Wisconsin borrowers and

borrowers outside of Wisconsin, but rather because the LoanSifter product has much higher broker penetration

in Wisconsin and subsequently may be used by brokers serving different subpopulations of borrowers as

compared to other states. However, results using the subset of the LS data that excludes all borrowers from

Wisconsin are qualitatively consistent to the results that follow, but they are not reported for conciseness.

3.5.4 Survivorship bias

The number of operating lenders in the LS data declines rapidly over time, which could be a source of

survivorship bias. For example, a result that lenders charged higher interest rates could be confounded if the low

underwriting standards of certain lenders that imploded in the beginning of the sample period caused their own

demise. In this example, it would be impossible to determine whether all lenders raised interest rates or if
merely some lenders who charged very low interest rates vanished from the data over time. Table 7 lists all 56

lenders in the LS data, their date of implosion and if they were owned by an investment bank. Figure 5

represents the decline in lenders over time graphically in which a lender’s prevalence in the LS data corresponds

to its size on the plot. Though the rate of implosions is relatively constant as the line is roughly linear, a group of

large lenders imploded starting in July 2007. Figure 6 graphs the impact of this on the LS data by plotting the

number of offers per borrower over time and in particular the precipitous decline in the number of offers per

borrower in July 2007 that coincided with these large implosions. However, I believe my results are robust to

this survivorship bias as I have estimated all models with a subsection of the LS data that only includes offers

from lenders that survive and the results are qualitatively consistent, but not reported for conciseness.

4 Methods

Ideally, this paper would estimate results from lenders’ complete rate sheets as these define the full set of

mortgages a lender is willing to underwrite for any borrower. However, because the LS data only contains search

results for certain borrowers at certain points in time generated from these rate sheets, I instead estimate

regressions that approximate the form of a rate sheet to recover the underlying data and to determine how

underwriting standards in the subprime mortgage industry vary across borrowers, lenders, time and geography.

Underwriting standards will be measured by the spread over the 10-year Treasury rate a lender charges a

borrower (Spread) and an offer’s underwriting limits (Max LTV , Max DTI and Max Cash-out) as they are the

metrics used by lenders to determine their compensation for credit risk and to define the universe of possible

mortgages available to a borrower, respectively.

4.1 Basic specifications

4.1.1 Credit spread

The general form of the regression used to estimate the determinants of an offer’s credit spread will be:

Spread = α Variables of interest + υ Underwriting limits + µ Mortgage controls + β Borrower controls

+ π Property controls + λ Lender controls + γ Global controls + ε

where the α coefficients are the coefficients of interest for trends with respect to different types of variation as

listed in the following table:

Type of variation Variables of interest

Basic ‹‹LTV››, ‹Credit Score›, I Stated Income * DTI, ‹Loan Amount›

Borrower I Subprime, I Subprime * ‹‹LTV››, ‹Credit Score›, I Subprime * I Stated Income * DTI, I Subprime * ‹Loan Amount›

I Investment Bank, I Implosion, I Investment Bank * ‹‹LTV››, I Implosion * ‹‹LTV››, I Investment Bank * ‹Credit Score›,
Lender
 I Implosion * ‹Credit Score›, I Investment Bank * I Stated Income * DTI, I Implosion * I Stated Income * DTI,
I Investment Bank * ‹Loan Amount›, I Implosion * ‹Loan Amount›

I Month, I Post-July 2007 * ‹‹LTV››, I Post-July 2007 * ‹Credit Score›, I Post-July 2007 * I Stated Income * DTI,
Time

I Post-July 2007 * ‹Loan Amount›

HPA State 2004 – 2006, HPA State 2007, HPA Division 2004 – 2006, HPA Division 2007, HPA Region 2004 – 2006,
Geography
HPA Region 2007, I State, I Division, I Region

In analyzing borrower, lender and time trends, I decompose the effect of main credit risk variables (LTV, Credit

Score, DTI and Loan Amount) by I Subprime, I Investment Bank and I Implosion and I Post-July 2007, respectively, to test if these

risk factors affect credit spread differently for subprime and prime borrowers, lenders owned by investment banks and

lenders that imploded as compared to other lenders or before and after July 2007. For geographic trends, I test if

past or contemporaneous house price appreciation at the state or regional level or geographic fixed effects were

significantly associated with an offer’s credit spread.

The functional form of each variable is grounded in both the structure of rate sheets and economic theory.

In the above table, the double angle brackets indicate that the bracketed variable (LTV) will be partitioned into

separate variables by break points, the single angle brackets indicate that the bracketed variable (Credit Score

and Loan Amount) will be partitioned into a set of indicator variables and the asterisk indicates that the

variables will be fully interacted. LTV will be partitioned into multiple variables by break points every 5-

percentage points between 65 and 100 to approximate the interval treatment of the loan-to-value ratio in rate

sheets such as in the horizontal axes of the rate matrices in Figure 2. However, unlike in Figure 2 in which two

mortgages with loan-to-values of 95 and 100 are considered equivalent as they lie in the same 5-point interval, I

will partition the loan-to-value ratio into separate variables by break points, which will allow the effect of the

loan-to-value ratio to vary within a given interval. This is consistent with the structure of rate sheets, which

frequently include additional adjustments for mortgages with small down payments (high loan-to-value ratios)

outside of the matrix structure, and economic theory, which states additional leverage always increases credit

risk all else equal. Credit Score will be partitioned into a set of indicator variables by 20-point intervals between

500 and 700 exactly as in the vertical axes of the rate matrices in Figure 2, because unlike LTV, variations in

Credit Score within a given interval are likely to have a negligible impact on credit spread, particularly because

these intervals are relatively small. Loan Amount will be partitioned into the same intervals as in the top of the
Pricing Adjustments column in Figure 2 with an additional interval for if the mortgage is larger than the Fannie

Mae conforming loan limit during the sample period of $417,000, which will test if the size of a mortgage has

any effect on a mortgage’s credit spread. Finally, I Stated Income and DTI are interacted to allow the effect of the

debt-to-income ratio to vary depending on whether the borrower provided income documentation, as it would

be expected that a borrower’s stated income would be treated differently by a lender than a borrower’s

documented income.

The following table describes the variables included in each set of controls:

Set of controls Variables

Underwriting limits Max LTV, Max DTI, Max Cash-out

Mortgage controls
 I Second Mortgage, I Amortization Type, I Prepayment Penalty, I Maturity


Gross Disposable Income, x-day Late Notices, Chargeoffs, Open Collections, Tradelines, I Chapter x
Borrower controls

Bankruptcy, I Notice of Default, I First-time Homebuyer, I Employment Type, I Purpose


Property controls I Property Type, I Residency Type, I Rural

Lender controls I Lender, I Investment Bank, I Implosion

Global controls I Month, I State, Treasury Rate x, x ≠ 10-year, HPA State 2004 – 2006, HPA State 2007

Each set includes every variable in its respective category in Table 1 except those that are used to construct other

variables included in the regression to control for other observed factors that lenders input to their credit risk

models. For example, Monthly Payment is not included in the mortgage controls set because it is used to

calculate DTI.15

Because there is a large loss of lenders over time as previously discussed, the panelized LS data is extremely

unbalanced. In lieu of a panel specification which would be theoretically preferable, the error term in all

specifications will both be heteroskedastically-robust and clustered by lenders.

4.1.2 Underwriting limits

The general form of the regression used to estimate the determinants of an offer’s underwriting limits will

be:

Underwriting limits = ά Credit Score + α x-day Late Notices + α I Stated Income + α I Residency + α I Purpose
+ ά I Investment Bank + ά I Implosion + ά I Month + ά HPA State 2004 – 2006 + ά HPA State 2007 + ς Spread
+ µ Mortgage controls + β Borrower controls + π Property controls + γ Global controls + ε

where the α and ά coefficients represent the coefficients of interest and the sets of controls are previously

defined. This specification is similarly inspired from the structure of a rate sheet in which a borrower’s credit

15 The one exception to this rule is Loan Amount which is the numerator of LTV.
score, past late mortgage payments, income documentation, residency type and mortgage purpose are the main

determinants of underwriting limits as for the maximum loan-to-value ratio in bottom of the Pricing

Adjustments column of Figure 2.The ά coefficients on Credit Score, I Investment Bank and I Implosion, I Month, HPA State 2004

– 2006 and HPA State 2007 will also be used to verify the respective trends in borrower characteristics, lender

characteristics, time and geography in credit spreads. The error term will once again be heteroskedastically-

robust and clustered by lenders.

4.2 Alternative specifications

As a robustness check, I also use nonlinear and semiparametric specifications of LTV, Credit Score and

Loan Amount in determining an offer’s credit spread and find that the results using the main LS data are

qualitatively consistent, but I do not report them for conciseness. Though the nonlinear specification (a cubic

LTV, a quadratic Credit Score and a quadratic Loan Amount) may be more intuitive and yield the same

qualitative results, it is also less theoretically accurate. For example, by imposing a cubic form on LTV, the

estimated effect is required to bend down for intermediate values of the loan-to-value ratio even though the

effect should always be increasing based on the rate sheet structure and economic theory. The qualitatively

consistent results using the semiparametric specification (a partial linear regression in LTV, Credit Score and

Loan Amount) show that the results that follow are robust to the choice of break points in dividing these

variables in the basic specification.

5 Results

This section will decompose underwriting standards as measured by an offer’s credit spread and

underwriting limits by borrower characteristics, lender characteristics, time and geography.

5.1 Credit spreads

The credit spread over the risk-free rate that a borrower has to pay in interest is a holistic measure of

estimated credit risk as it both defines a lender’s compensation for credit risk and a borrower’s cost of

borrowing.

5.1.1 Borrower characteristics

A borrower’s assets and credit history are surely important determinants of his credit risk in the eyes of a

lender; however, they also may matter differently for different borrowers. If the HPA hypothesis is true, a
subprime borrower’s credit risk would be more sensitive to variables related to house prices such as his loan-to-

value ratio and loan amount and less sensitive to variables related to his ability to repay such as his debt-to-

income ratio and past last mortgage payments as compared to a prime borrower. This is because the HPA

hypothesis models the performance of a subprime borrower discretely: he will in all likelihood only be able

afford his monthly payments for a couple of years, so he will either refinance or sell his house if he has positive

equity at the end of this period (if house prices have gone up or stayed relatively flat) or he will default if he has

negative equity (if house prices have gone down enough). In this way, the credit risk of a subprime borrower is

mainly composed of this house price sensitivity, which is higher if he has a high loan-to-value ratio (little home

equity), not his ability to repay the mortgage because, unlike a prime borrower, it was unlikely that he was ever

going to be able to pay off the mortgage to maturity in the first place.

5.1.1.1 A note on defining subprime borrowers

As explained in Table 1, this paper defines a subprime borrower as a borrower with an average credit score

(of the Experian, Equifax and TransUnion credit scores) of less than or equal to 620, which is a commonly used

definition in the literature. The three other typical ways to label a borrower as subprime as discussed by Foote,

Gerardi, Goette and Willen are based on the type of mortgage-backed security in which a borrower’s mortgage is

securitized, if the interest rate on the borrower’s mortgage is more than 300 basis points higher than the

Treasury rate of equivalent maturity or if a borrower’s mortgage was originated by a lender on the Housing of

Urban Development’s “Subprime Lender List.” The first alternative method is impossible because mortgage

offers in the LS data are unrelated to future securitizations, the second method is econometrically problematic as

this paper’s principal exercise is to estimate the determinants of a mortgage’s credit spread and the third method

is impractical because the HUD list does not cover smaller, regional lenders which constitute a meaningful share

of the observations in the LS data. However, Gerardi, Lehnert, Sherlund and Willen also state that these

definitions are practically interchangeable.

5.1.1.2 Model estimation

Regression (1) on Table 8 estimates credit spread by specifying the main credit risk variables linearly and

controlling only for state, lender and month fixed effects. Even with an imperfect specification and limited

controls, the regression has an adjusted R2 of nearly 60% and the coefficients on LTV, Credit Score, I Stated Income

and DTI are all highly significant and of their expected signs (+, -, + and +, respectively).
 Regression (2) approximates the matrix structure of a rate sheet by partitioning LTV and Credit Score and

including the full set of controls. The following table shows the effects of one standard deviation changes in

individual credit risk variables from their respective sample means on estimated credit spreads in the two

specifications holding all other variables constant:

(+/-) ∆ Spread, (1) ∆ Spread, (2)

Mean
Std Dev (bps) (bps)
LTV 74.65 19.33 45.58 167.43
Credit Score 667.05 -77.90 60.84 165.21
DTI 34.42 9.91 2.77 8.25

The table shows that the interval specification triples the predicted effect of changes in the partitioned variables

as compared to the linear specification. Also, it shows that the loan-to-value ratio and credit score are

enormously important predictors of credit spread as a one standard deviation shift up (down) in LTV (Credit

Score) results in a more than 160 basis point increase in Spread whereas a similar shift up in DTI only results in

an 8 basis point increase. As expected, regression (2) shows that lenders charge a sizable 60 basis point

premium to borrowers who do not document their income. Surprisingly, however, a borrower’s debt-to-income

ratio has more than twice the effect on his mortgage’s credit spread if he did not offer income documentation as

compared to if he did as the coefficient on the interaction between I Stated Income and DTI is significant and of the

same magnitude as the DTI coefficient. In this way, regression (2) shows that change in the credit spread on a

stated income borrower’s mortgage would increase 17 basis points for a one standard deviation higher debt-to-

income ratio as compared to only an 8 basis point premium if the borrower gave full income documentation.

This is surprising as it seems a borrower’s stated income would have very little information value to lenders;

however, lenders are actually more sensitive to a borrower’s stated income than his documented income

inasmuch as it is an input in the debt-to-income ratio, perhaps to compensate for the fact that a borrower’s

stated income is likely higher than his actual income.

Figures 7 and 8 graph estimated credit spread against LTV and Credit Score, respectively. Figure 7 shows

that a borrower’s loan-to-value ratio affects his offer’s credit spread more as it gets closer to 100. This is

consistent with the claim that negative equity is a necessary condition for a borrower to default on a mortgage,

as this implies a borrower’s current loan-to-value ratio is more than 100. Figure 8 shows a similar relationship

with respect to a borrower’s credit score, namely it affects his cost of borrowing more when it is very low and the

marginal discount he earns for having a high credit score declines rapidly as his credit score increases.

Because this data offers a uniquely direct look into industry trends in mortgage underwriting standards, the

coefficients on the additional variables merit discussion in their own right. First, the coefficients on the Loan
Amount indicators show that lenders charge a higher cost of borrowing for very small and very large mortgages

as compared to average-sized ones, a relationship that is graphed in Figure 9. Because lenders have mostly fixed

origination costs in salaried loan officers and rent, it seems natural that they would give discounts on large

mortgages, which explains why the expected credit spread declines 85 basis points for a borrower who all else

equal wants to get a $200,000 mortgage as compared to a $50,000 one. However, at the same time, as shown

by Pearce and Miller (2001) government-sponsored enterprises that are mandated to buy conforming (average-

sized) mortgages significantly lower the cost of borrowing through such mortgages. With this in mind, it should

come as no surprise that the curve in Figure 9 is lowest for average-sized mortgages but jumps up for “jumbo”

mortgages that exceed $417,000. Further, regression (2) estimates that the government-sponsored enterprises

reduced interest rates on conforming mortgages by 38 basis points, the difference between the I 225 < Loan Amount <=

417 and I Loan Amount > 417 coefficients, which is approximately the same as Pearce and Miller’s estimate of 25 basis

points using data from the early 1990s.16 This is an important number in the context of the government

takeovers of Fannie Mae and Freddie Mac as it produces a quantifiable estimate of the direct benefit they

provide US homebuyers in lower interest rates.

Second, the coefficients on the late notice variables show that lenders will punish borrowers who have been

late on a mortgage payment within the last year. This is perhaps a fairly obvious result; however, the magnitudes

of the premiums for different lengths of late payments are surprising. Lenders only charge a moderate premium

on the order of 10 basis points for each 30- or 60-day late payment, but they charge 65 basis points for each 90-

day late payment and 154 basis points for each 120-day late payment. This is presumably because such late

payments are nearly equivalent to a default, whereas a 30- or 60-day late payment could simply have been a

monthly cash flow fluctuation.17 Unfortunately, the unreported coefficients on I Notice of Default and I Chapter x Bankruptcy

are insignificant likely because they are so sparsely populated so it is impossible to verify this explanation by

comparing the effects of a near default with that of an actual one.

Lastly, the coefficients on the prepayment penalty variables confirm that the option to refinance at any time

has an economically meaningful cost for a borrower. Because the I Any Prepayment Penalty variable in which a borrower

query includes mortgages with all lengths of prepayment penalties is the omitted indicator in the set, the

coefficients must be compared to one another to generate meaningful costs for different prepayment penalty

periods. Relative to the 2-year prepayment penalty option which is the most common in the LS data and the

16 The two-sided t-statistic for the difference between the I 225 < Loan Amount <= 417 and I Loan Amount > 417 regression coefficients is 3.10, which
rejects the null hypothesis at the 1% significance level.
17 Indeed, some lenders actually foreclose on a borrower’s property after more than 90 days of waiting for payment depending on if

the state foreclosure laws allow it.

default for the subprime mortgage industry, the ability to refinance at any time costs a borrower 61 basis points

(the difference between the I 2-year Prepayment Penalty and I No Prepayment Penalty coefficients), which is consistent with the

80 basis point estimate of Mayer, Piskorski and Tchistyi (2008) using data from securitized fixed rate mortgages

over the same period as the LS data.18 Contrastingly, a borrower can earn an 83 basis point discount by forgoing

his option to refinance for four years as compared to two years.19 In the interest of brevity, I leave the reader to

independently verify the effects of the amortization, employment and residency controls.

Regression (3) estimates a function of credit spread that allows the effect of the loan-to-value ratio to vary

for prime and subprime borrowers. The model predictions for different loan-to-value ratios are graphed in

Figure 10, which shows how credit spreads are more sensitive to a borrower’s loan-to-value ratio for a subprime

borrower than a prime borrower. Indeed, the effect on credit spread of a one standard deviation increase in a

borrower’s loan-to-value ratio from its sample mean is an estimated 158 basis points for a prime borrower as

compared to 198 basis points for a subprime borrower.

Regression (4) similarly finds that the non-linear effect of loan amount on credit spread is significantly

different for prime and subprime borrowers, a relationship which is graphed on Figure 11. Regression (4)

estimates that a prime borrower who applies for a $200,000 mortgage instead of a $50,000 one would receive a

93 basis point discount on his credit spread all else equal whereas a subprime borrower would only get a 58

basis point one. Just like the subprime curve on Figure 10, the subprime in Figure 11 curve “pulls up” much

earlier than the prime curve. It is curious why the effect of loan amount differs between the two borrower types.

One potential explanation is that lenders viewed subprime borrowers who were buying expensive houses (which

is equivalent to a large loan amount since the loan-to-value ratio is controlled for in the regression) as being

more likely to overpay, which would be equivalent to an increase in their loan-to-value ratio as the denominator

would be artificially inflated. This is analogous to the findings of Griffin, Harris and Topaloglu (2005), who use

evidence from the investment activity of day traders during the Internet stock bubble to show that relatively

unsophisticated and less well-off market participants have a higher risk of buying at the top of asset bubbles

because their point of entry into the market itself depends on the good performance of these assets.

Regression (5) allows for the effect of the interaction of I Stated Income and DTI to vary for prime and subprime

borrowers and shows that the debt-to-income ratio has no significant effect on credit spread for subprime

borrowers regardless of income documentation. The following table calculates the “fully loaded” DTI regression

18 The two-sided t-statistic on the difference between the I 2-year Prepayment Penalty and the I No Prepayment Penalty coefficients is 8.62, which
rejects the null hypothesis at the .1% level.
19 The two-sided t-statistic on the difference between the I 4-year Prepayment Penalty and the I 2-year Prepayment Penalty coefficients is -4.74, which

rejects the null hypothesis at the .1% level.

coefficients and their significance for each of the four possible combinations of income documentation and

borrower type by summing the appropriate interaction coefficients:

I Subprime = 0 I Subprime = 1
I Stated Income = 0 0.774*** 0.093
I Stated Income = 1 1.892*** 0.221

Though variation in the debt-to-income ratio is not nearly as economically meaningful as variation in loan-to-

value or credit score, the finding that lenders ignored a subprime borrower’s ability to repay inasmuch as it is

measured by his debt-to-income ratio is striking.

Regression (6) fully interacts the effect of being a subprime borrower with all major risk variables. All of the

previous qualitative results hold in this multiple interaction specification, but their relationships are less easily

graphed. Further, regression (6) shows that the effect of late mortgage payments on credit spread is dramatically

smaller for subprime borrowers as shown in the following table, which calculates the coefficients and respective

significance of the late mortgage payment coefficients by borrower type:

∆ Spread ∆ Spread
(I Subprime = 0) (I Subprime = 1)
30-day Late Notices 19.57*** 9.54
60-day Late Notices 9.27 11.74
90-day Late Notices 130.3*** 68.51**
120-day Late Notices 360.1*** 102.5

As shown in the table, lenders punish prime borrowers who have had very late mortgage payments in the last

year by as much as 130 basis points for each 90-day late payment and 360 basis points for each 120-day late

payment. Contrastingly, lenders are relatively insensitive to the late mortgage payments of subprime borrowers

and in fact seem to ignore them altogether with the exception of 90-day late payments. Regression (6) also

shows that lenders charge subprime borrowers 23 basis points more than prime borrowers to get a mortgage

with no prepayment penalty period, which once again confirms the implications of the model presented by

Mayer, Piskorski and Tchistyi, namely that less creditworthy borrowers benefit more than prime borrowers from

the real option to refinance their mortgage at any time and do so more often as previously discussed.

This section has shown that the effects on credit spread of the loan-to-value ratio and loan amount were

larger for subprime borrowers than prime borrowers whereas the effects of the debt-to-income ratio and past

late mortgage payments were smaller, which leads to my first result:

RESULT #1 – Lenders were more sensitive to risk factors related to house prices and less
sensitive to risk factors related to ability to repay for subprime borrowers as compared to
prime borrowers.

5.1.1.3 Discussion
 This result is new evidence in support of the central thesis of the HPA hypothesis. The pattern of

lenders being more sensitive to risk factors related to house prices and less sensitive to risk factors related to

ability to repay for subprime borrowers as compared to prime borrowers supports that subprime borrowers’

credit risk was largely their sensitivity to house prices not their ability to repay as measured by lenders’ own

risk models. Without data on mortgage performance, it is impossible to determine if these risk premia were

high enough to justify underwriting these mortgages; however, given the unexpectedly high level of

foreclosures from 2007 to present, lenders that had borrowers accept their offers in the LS data almost

surely lost money by essentially financing subprime borrowers’ leveraged bets on house prices that went

against them as predicted by the HPA hypothesis. Indeed, this result seems to indicate that lenders

understood the sensitivity of subprime borrowers to house prices but grossly misestimated the future course

of house prices just like Gerardi, Lehnert, Sherlund and Willen similarly find for investors in mortgage-

backed securities.

5.1.2 Lender characteristics20

Different lenders may have given the same borrowers economically different mortgage offers. Because

the LS data has rich variation in the mortgages different lenders were willing to give to the same borrower

and explicitly identifies the lender, this paper can test if different groups of lenders had meaningfully

different underwriting standards. If the O-to-D hypothesis is true, lenders that securitize a higher

percentage of the mortgages they originate would be looser than other lenders because they have less

ownership interest in its underlying credit quality. However, lacking such proprietary data on this

securitization percentage, I will use lender ownership by an investment bank as a proxy, since Kiff and Mills

(2007) present survey evidence that such lenders securitized at higher rates and investment banks were the

primary securitizers of subprime mortgages. Similarly, I will test if lenders that imploded were looser than

those that survived to see if the type of mortgages such lenders were willing to underwrite may have played a

role in their implosions.

5.1.2.1 Model estimation

Regression (1) on Table 9 shows that lenders were owned by investment banks and lenders that imploded

charge on average 113 and 107 basis points less in credit spread to an identical borrower for an identical

20All models estimated in this section do not include 19,485 observations from three lenders (Argent Mortgage, Encore Credit and
Equifirst) that were acquired by investment banks during the sample period as is shown in Table 7.
mortgage as compared to a lender that was not owned by an investment bank or is still operating, respectively.

These effects are enormous – each represents by itself a standard deviation decrease in Spread. In terms of the

effects of borrower variables, the effect on credit spread of an offer being from either type of lender is

approximately equivalent to a borrower’s loan-to-value ratio going from 85 to 75, his credit score going from

600 to a perfect 850 and twice the effect of him offering income documentation.

Regressions (2) to (4) decompose the effect of the loan-to-value ratio, credit score and loan amount on

credit spread for lenders that were owned by investment banks and those that were not with the curves for the

two groups graphed in Figure 12. For the most part, the difference between the two groups is a flat effect not a

different treatment of certain credit risk variables. The two groups treat the loan-to-value ratio and credit score

the same as is shown by the two jointly and individually insignificant sets of interactions in regressions (2) and

(3); however, they differ slightly with respect to the treatment of loan amount. Specifically, lenders that were

owned by investment banks demand a 70 basis point premium for “jumbo” mortgages as compared to other

lenders, which is clearly seen in the high tail of the red curve in the third panel of Figure 12. This seems to be

consistent with the fact that lenders that were integrated into investment banks securitized more than other

lenders by selling their mortgages to government-sponsored enterprises or private investors after origination.

This is because lenders that plan to hold a mortgage and collect interest on it over its life should treat a

$416,000 mortgage and a $418,000 one nearly the same all else equal, but lenders that plan to securitize the

non-conforming $418,000 mortgage will demand a premium to originate it because there is a much smaller pool

of capital that subsequently can buy it from them.

Regressions (5) to (7) perform the same decomposition for lenders that imploded and those that are still

operating to test if the two groups treated certain risk factors differently. Again, for the most part, the results

find that lenders that imploded were not looser with respect to certain risk factors, but rather charged less across

the board. The two groups charged similar credit spreads for changes in loan-to-value and loan amount as is

shown by the respective sets of jointly and individually insignificant interactions in regressions (5) and (7). The

three panels of Figure 13 graph estimated spreads against these respective variables for the two lender groups

and confirm that the curves have the same shapes but the imploded lenders’ curves are significantly lower at

every point. The exception is credit score in regression (6) and the second panel, which over certain ranges

produce indistinguishable offers from the two groups, in particular when a borrower’s average credit score is

between 519 and 559 or 579 and 599. However, the lenders that imploded both charge less to borrowers with

extremely low credit scores and give greater discounts to borrowers with high credit scores.
 Because these two groups of lenders provided borrowers with meaningfully cheaper financing than other

lenders, it seems likely that their offers were accepted more often by borrowers. Using the decision rule that

borrowers accept the offer that provides him with the smallest credit spread, the following table calculates the

percentage of accepted offers from the two lender groups for borrowers with different ranges of credit scores as

compared to the percentage of all lenders in the LS data that each lender group represents, which are graphed

on Figure 14:21

Credit Score range

500-550 550-600 600-650 650-700 700-750 750-800 800-850
% Accepted (I Investment Bank = 1) 32.3% 35.0% 30.1% 34.7% 28.7% 26.7% 30.1%
% I Investment Bank = 1 in LS data ---16.1%---

% Accepted (I Implosion = 1) 96.0% 80.4% 86.5% 95.6% 92.4% 95.5% 96.5%

% I Implosion = 1 in LS data ---83.9%---

As can be seen in the table and the figure, borrowers in almost every Credit Score range disproportionately

accept offers from lenders that were owned by investment banks and lenders that imploded. This shows that if

borrowers were using this decision rule, these lender groups were likely doing most of the lending in the LS data.

This section comprises my second result:

RESULT #2 – Lenders that were owned by investment banks and lenders that imploded
were looser across the board and were likely lending more than other lenders.

5.1.2.2 Discussion

This result is new evidence in support of a key part of the O-to-D hypothesis, namely that lenders that were

owned by investment banks and likely securitized a higher percentage of the mortgages they originated had

lower underwriting standards than other lenders. Though this specification does not observe actual

securitization rates, it presents a nearly direct mechanism through which the originate-to-distribute business

model of subprime lenders owned by investment banks caused them to rationally underwrite nonsensical

mortgages and suggests that regulation of mortgage securitization may be welfare-improving. Further, the result

that lenders that imploded offered much cheaper financing than the lenders that are still operating seems to

suggest that low underwriting standards may have played a role in their implosions, namely they were lending

more than other lenders. Overall, these results are particularly striking because of their magnitude and the fact

21As discussed in the note on Figure 14, because the percentage of lenders that implode in the LS data declines rapidly over time by
construction, this table only considers the 137,890 offers in the LS data from January 2007 to March 2007 when the portion of
imploded lenders was relatively constant.
that all lenders both observe the same borrower characteristics and have essentially the same production

function in a frictionless capital market.

There are some potential shortcomings to this result. First, ownership is a rough proxy for higher

securitization. For example, Countrywide, a prominent subprime lender, was not owned by an investment bank,

but was a prolific securitizer and even had its own in-house securitization division. Also, this specification does

not control for other lender characteristics beyond lender fixed effects. For example, larger lenders may have

had substantial cost synergies and subsequently been able to offer cheaper mortgages than other lenders

because of this, not because they had lower underwriting standards. However, because nearly all of the lenders

in the LS data are privately held and no longer operating, it was impossible to construct either a better measure

of securitization or a more complete set of lender controls.

5.1.3 Time

Lenders likely were willing to underwrite different types of mortgages at different points in the sample

period. Both the O-to-D and HPA hypotheses predict higher credit spreads over the sample period but for

different reasons, namely the drying up of the market for securitized products and the nationwide decline in

house prices, respectively. However, the general turmoil in the financial system that was not specific to the

housing market may also contribute to this time trend as many companies and governments also saw their

cost of borrowing skyrocket during the sample period.

5.1.3.1 Model estimation

Regression (1) on Table 10 shows the time trend in credit spreads with month fixed effects. As expected,

the worsening of the financial crisis over time corresponded with tightening underwriting standards as

measured by significantly more expensive mortgage financing. Figure 15 graphs a curve of the linearly

interpolated I Month coefficients against important events in the financial crisis and the implosions of the 10

largest lenders in the LS data. Interestingly, though the trend in credit spreads over time is always

significantly positive, the most dramatic period of tightening was started in July 2007, the first month in a

6-month period from July 2007 to December 2007 in which 8 of the top 10 lenders in the LS data imploded.

Overall, the magnitude of the time trend is astounding – the average borrower in the LS data seeking an

average mortgage went from having to pay 288 basis points above the 10-year Treasury rate in January

2007 to having to pay 492 basis points above the 10-year Treasury rate less than a year and a half later in

May 2008. This trend is so large that in spite of the Federal Reserve aggressively lowering interest rates, the
mortgage rate for an average borrower in the LS data actually rose during the sample period from 7.64% in

January 2007 to 8.90% in May 2008, which is fully decomposed over time in Figure 16. In other words, the

average borrower in the LS data who can just afford a mortgage with monthly payments of $1080 in

January 2007 must be able to afford $1258 monthly payments in May 2008 to be able to get the same

mortgage.

Regressions (4) to (8) decompose the time trend by credit risk variables to test if lenders became more

sensitive to certain risk factors over time or if lenders simply became exogenously tighter by interacting

credit risk variables with an indicator for if the offer occurred during or after July 2007, the break point

previously discussed. The coefficients on the sets of interactions indicate that lenders became more sensitive

to variables related to the borrower’s ability to repay such as credit score, not offering income

documentation and past late mortgage payments, but did not become more sensitive to variables related to

house prices such as the loan-to-value ratio and loan amount. Figure 17 graphs estimated credit spread

against credit score for offers from the two periods, which shows that borrowers with very low average credit

scores between 500 and 519 had to pay 177 basis points more in credit spread from July 2007 onward, or

more than double what they previously had to pay before July 2007 for having a low credit score, while

borrowers with higher credit scores got significantly lower discounts. Similarly, the premium for not

offering income documentation triples from 35 basis points to 92 basis points and the premium for a 120-

day late mortgage payment within the past year goes from 277 basis points to 423 basis points between the

two periods. On the other hand, it was surprisingly equally expensive to get a mortgage with a high loan-to-

value ratio or that was particularly large between the two periods. However, I will later show that many

lenders dramatically lowered their leverage limits, which they presumably did rather than charge more for

leverage over time.

This section comprises my third result:

RESULT #3 – Lenders became much tighter from January 2007 to May 2008.

5.1.3.2 Discussion

As previously discussed, this result does not distinguish between the predictions of the O-to-D and HPA

hypotheses, but it is interesting in its own right. Most importantly, it shows that in spite of recent monetary

policy decisions to lower interest rates and government intervention in buying mortgage-backed securities
to increase the flow of credit, the mortgage market was still tight as of May 2008, particularly for the least

creditworthy.

5.1.4 Geography

Lender underwriting standards may also vary by geopgrahy. If the O-to-D hypothesis is true, underwriting

standards would be lower in states with high past and contemporaneous house price appreciation. This is

because the O-to-D hypothesis claims that these regional housing bubbles were created by a (vicious or virtuous,

depending on your perspective) cycle between higher house prices and lower underwriting standards that was

catalyzed by securitization.

5.1.4.1 Model estimation

Regressions (1) to (3) on Table 10 show the effect of geography on credit spreads using different

regional fixed effects (states, Census divisions and Census regions, respectively) and past and

contemporaneous house price appreciation in the region. The coefficients on the house price appreciation

variables show that both past and contemporaneous house price appreciation had a jointly and individually

insignificant effect on lender underwriting standards. Even if the coefficients’ insignificance is driven by the

geographic concentration in the LS data, the predicted effect of a borrower living in a state with one

standard deviation higher house price appreciation from 2004 to 2007 all else equal would only be a

decrease in an offer’s credit spread by 26 basis points. This is approximately equivalent to the effect on

credit spread of a borrower having an average credit score of 600 instead of 580 or applying for a mortgage

in January 2007 instead of February 2007. The F statistics testing if all of the coefficients on the geographic

controls are equal to zero further confirm that there is little geographic variation in underwriting standards,

except at the state level. Because these geographic fixed effects are only significant at the state level and not

the division or region level, it suggests that the significance of the state fixed effects is driven by state

mortgage laws such as those that regulate foreclosure and predatory lending that have been shown to

impact lender underwriting practices by Pence (2003) and Elliehausen and Staten (2005), respectively, and

seems unlikely to be due to unobserved factors related to house prices that would presumably cause all of

the geographic fixed effects to be significant.22 Ultimately this shows that underwriting standards in bubble

22For example, the effect of state laws regulating prepayment penalties can be seen in Figure 2 in the Pricing Adjustments column in
which a property being in a “Partial Prepay State” or a “No-Pre State” cause a borrower’s interest rate to directly increase by 25 or 40
basis points, respectively.
markets such as the Southwest were not distinguishable from underwriting standards in other areas, which

comprises to my fourth result:

RESULT #4 – Lenders did not have meaningfully different underwriting standards across
the country.

5.1.4.2 Discussion

This result rejects part of the O-to-D hypothesis that states low underwriting standards caused regional

housing bubbles in areas of the country in which lenders frequently securitized mortgages. It is important to

note that though the relationship between underwriting standards and house prices may be subject to

reverse causality, this does not change the interpretation of this result. This is because the O-to-D

hypothesis predicts that both directions of causality would lead to a negative correlation between credit

spread and house price appreciation (lower underwriting standards caused higher house prices and higher

house prices caused lower underwriting standards), which is not supported by the consistently insignificant

coefficients. With this in mind, the previous (insignificant) 26 basis point estimate may even be overstated.

This result also has implications beyond the predictions of the O-to-D hypothesis. Assuming that

underwriting standards had no feedback effect on house price appreciation, the finding that lenders did not

adjust their underwriting standards based on house price appreciation could be an insight into the recent

increase in foreclosures because it implies that lenders “trusted” nonsensical house prices. In some areas of

the country, house prices rose as much as 30% between 2004 and 2006 even though the cost of building a

house remained constant, which implies an inevitable decline in house prices at some point in the future. By

ignoring this reality, lenders may have set themselves up for catastrophe when the supply of houses

eventually brought down house prices to their cost of production, particularly in suburban, less densely

populated areas in which this supply response could be quickest, which is ultimately where house price

declines and foreclosures were concentrated.

There are some potential weaknesses in this result. First, there is often variation in house price appreciation

within a state, which may blunt its estimated relationship with underwriting standards in this specification.

However, in LoanSifter, lenders only observe the state in which a borrower’s property resides and rate sheets

such as Figure 2 vary by state or region not by zip code, so this likely does not bias my results. Second, house

price appreciation is only one measure of a housing bubble. Other important metrics are the price-to-rent and

the price-to-replacement ratios, which are used by as by Wheaton and Nechayev (2007) to test for housing

bubble and are respectively analogous to a stock’s price-to-dividend ratio and Tobin’s Q that are important
valuation metrics in the corporate finance literature used, for example, by Campbell and Shiller (1988) and La

Porta, Lopez-de-Silanes, Shleifer and Vishny (2002). However, to my knowledge, recent state-level data from

2007 to 2008 for these metrics is not yet available. Further, house price appreciation is likely the key driver of

changes in these ratios as rents and building costs are relatively stable over short time periods, so any

unobserved effects are likely small.

5.2 Underwriting limits

Though a credit spread determines a lender’s compensation for credit risk, it does not specify the universe of

mortgages a lender is willing to underwrite in the first place, which are determined by underwriting limits. In

this spirit, this section performs a similar decomposition as above to check the robustness of the previous results

and shows that they are qualitatively consistent using underwriting limits rather than credit spreads as a

measure of underwriting standards. The underwriting limits available in the LS data are the maximum loan-to-

value and debt-to-income ratios a lender allows a borrower to have after origination and the maximum amount

a borrower can cash out in home equity in a future refinancing.

5.2.1 Leverage limits

The most important underwriting limit of the three is the maximum loan-to-value ratio as this defines the

maximum leverage that a lender is willing to extend a borrower, his minimum home equity to get a mortgage

and his sensitivity to house prices under the HPA hypothesis. For example, if a borrower applies for a mortgage

with a loan-to-value ratio of 80 but his maximum loan-to-value ratio is 90, the lender is giving him the option to

increase his leverage from 5:1 to 10:1 if he is willing to pay a higher interest rate. In the extreme, a maximum

loan-to-value ratio of 100 implies that the lender is willing to give the borrower infinite leverage by allowing him

to buy a home with no equity.

5.2.2 Borrower characteristics

Regression (1) on Table 11 shows the determinants of a borrower’s maximum loan-to-value ratio. As

expected, lenders give less creditworthy borrowers less maximum leverage as can be seen by the negative

coefficients on Credit Score and I Stated Income. However, past late mortgage payments, residency type and

mortgage purpose do not significantly affect a borrower’s maximum leverage. The following table shows

how changes in borrower characteristics change financing options for the average borrower in the LS data

seeking an average mortgage in July 2007:

 ∆ Max LTV ∆ Min Down
(+/-) Std Dev
(% pts) ($)
Credit Score -77.9 -0.23% $740
I Stated Income 0 to 1 -1.28% $4121

Since a borrower must pay for 100% of the value of the home either through debt or equity, a decrease in his

maximum loan-to-value ratio implies a corresponding increase in his minimum down payment. Not only do

less creditworthy borrowers have to pay a higher credit spread on their mortgage as shown before, they also

have to put up significantly more home equity. As shown in the third column of the table, borrowers with a

one standard deviation lower average credit score all else equal have to put up on average $740 more in a

down payment at purchase and borrowers who do not offer income documentation have to put up on

average $4121 more.

5.2.3 Lender characteristics

As before, lenders that were owned by investment banks and lenders that imploded were much looser

than other lenders. Unlike before, however, these effects dwarf the effects of borrower characteristics. The

following table shows how much more leverage the two lender groups were willing to extend to the same

borrower as compared to other lenders and the enormous corresponding reductions that these offers

implied for a borrower’s minimum down payment:

∆ Max LTV ∆ Min Down

∆
(% pts) ($)
I Investment Bank 0 to 1 8.93% -$28,754
I Implosion 0 to 1 7.66% -$24,663

This implies that borrowers who wanted more leverage were much more likely to accept offers from lenders that

were owned by investment banks and lenders that imploded.

Using the decision rule that borrowers accept the offer that provides him with the most leverage, the

following table calculates the percentage of accepted offers from the two lender groups for borrowers with

different Credit Score ranges as compared to the percentage of all lenders in the LS data that each lender

group represents, which are graphed on Figure 18:23

23As before, because the percentage of lenders that implode in the LS data declines rapidly over time by construction, this table only
considers the 137,890 offers in the LS data from January 2007 to March 2007 when the portion of imploded lenders was relatively
constant.
 Credit Score range
500-550 550-600 600-650 650-700 700-750 750-800 800-850
% Accepted (I Investment Bank = 1) 68.3% 70.4% 64.3% 68.9% 67.4% 70.3% 65.4%
% I Investment Bank = 1 in LS data ---16.1%---

% Accepted (I Implosion = 1) 100.0% 100.0% 98.6% 99.6% 97.8% 100.0% 100.0%

% I Implosion = 1 in LS data ---83.9%---

Not surprisingly given the results of regression (1), borrowers that chose mortgages based on how much

leverage they could maximally get from a lender were much more likely to accept offers from lenders that

were owned by an investment bank and lenders that imploded.

5.2.4 Time

Just like credit spreads trend up, the maximum leverage lenders were willing to give borrowers trends

meaningfully down as lender underwriting standards tightened over the sample period. The following table

shows the maximum leverage available to the average borrower in the LS data seeking an average mortgage

at different points in time in the sample period:

Max LTV Min Down

Min Down ($)
(% pts) (% pts)
January 2007 97.53% 2.47% $7952
July 2007 90.36% 9.64% $31,040
May 2008 91.06% 8.94% $28,785

As shown in the table, this borrower’s minimum down payment nearly quadruples from $7953 in January 2007

to $31,041 in July 2007, at which point it roughly stabilizes for the rest of the sample period. The time trend over

the full sample period is graphed in Figure 19. Interestingly, Figure 19 appears to be a rough reflection over the

x-axis of Figure 15, which graphs the increase in credit spreads over time, and seems to confirm that both are

consistent measures of underwriting standards broadly construed. The period after July 2007 is particularly

striking in the two figures as both a borrower’s maximum leverage steeply declines and his cost of borrowing

dramatically increases. In other words, though the decomposition of credit spreads over time previously showed

that the marginal cost of getting a mortgage with a higher loan-to-value ratio did not significantly change during

the sample period, this is likely because lenders simply stopped giving mortgages with very high loan-to-value

ratios from January 2007 to May 2008.

5.2.5 Geography

Finally, as before, the variation of leverage limits with respect to past and contemporaneous house price

appreciation and geographic fixed effects is not significant. Again, even if the insignificance of the effect of house
price appreciation is driven the geographic concentration in the LS data, regression (1) estimates that a borrower

living in a state with one standard deviation higher house price appreciation from 2004 to 2007 all else equal

would only have a 1.14 percentage point higher maximum loan-to-value ratio on an average offer, which is

approximately the same effect as offering income documentation and does not seem to be enough to fuel

regional housing bubbles.

5.2.2 Other underwriting limits

Regressions (2) and (3) show that the determinants of a borrower’s maximum allowable debt-to-income

ratio and maximum amount of a subsequent cash-out, few of which are significant. This is likely driven in part

by the extremely limited variation in these underwriting limits. As can be seen in Table 3, the range of offer’s

maximum debt-to-income ratios in the LS data is only 10 percentage points and more than half of the offers do

not allow a subsequent cash-out (Max Cash-out = 0), which suggests that lenders rarely use these metrics to

determine their underwriting standards. However, even with this limited variation, there is evidence that

lenders owned by investment banks and lenders that imploded were looser than other lenders. Regression (2)

shows that offers from the two groups had on average higher maximum debt-to-income ratios by 2.96 and 3.58

percentage points, respectively. Similarly, regression (3) shows that lenders owned by investment banks tended

to allow borrowers to cash out $200,000 more in home equity than other lenders, which gives the borrower the

real option to increase leverage at a future point in time. Unlike leverage limits, debt-to-income and cash-out

limits did not significantly trend down during the sample period, but they also similarly did not vary with

respect to house price appreciation or by state.

This section has largely confirmed this paper’s four results on underwriting standards as measured by

underwriting limits rather than credit spreads. In particular, it has shown that underwriting limits varied

significantly across borrower characteristics, lender characteristics and time, but not across geography.

6 Extension

This paper has presented results using multiple offers per borrower even though each borrower in the LS

data will accept at most one of them in order to estimate industry trends in subprime mortgage underwriting

standards. In this spirit, the LS data must be limited to the set of offers borrowers are most likely to accept to

estimate the impact underwriting standards had on borrower outcomes.

6.1 Model estimation

 Regression (1) on Table 12 estimates the previous decomposition of credit spreads using the 8123 offers in

the LS data that provide each borrower with the cheapest financing, an estimate of the frontier of best mortgage

offers in the LS data. In sum, the results show that the economic implications of a borrower’s best mortgage

offer and average mortgage offer are quite similar. The coefficients with respect to borrower characteristics and

time are nearly the same as those estimated using the full LS data, but are all slightly smaller, which shows that

borrowers who shopped offers across lenders were able to save 10 to 20 basis points in interest and confirms this

paper’s first and third results for the set of best offers in the LS data. Importantly, the effects of house price

appreciation on the best offer’s credit spread are again jointly and individually insignificant. This shows that

even the underwriting standards of the loosest lenders likely did not cause regional housing bubbles or cycles of

lower underwriting standards and further house price increases as is consistent with this paper’s fourth result.

Finally, though the two lender group indicators are (barely) insignificant, they are of the same sign and similar

magnitude as previously estimated. Their insignificance may be driven by the loss of variation between the main

LS data and the subset of the best offers that by construction does not include offers that different lenders gave

to the same borrower. However, as previously discussed in the lender characteristics sections and graphed in

Figures 14 and 18, these lender groups provided a disproportionate amount of the offers that gave borrowers

both the cheapest financing and the most leverage, which shows that a lender only had to be slightly more

aggressive than others to likely increase its origination volume dramatically.

6.2 Discussion

The consistency of my results for the main LS data and this subset of the best offers indicates that there

were no “outlying” lenders who systemically priced credit risk in a different matter than other lenders that

confound the economic implications for borrowers of the previously estimated industry trends in underwriting

standards. That is, both the average offers and the best offers imply that subprime borrowers’ credit risk was

composed of house price risk not repayment risk, lenders that were owned by investment banks and lenders that

imploded were looser than other lenders, lenders got tighter over time and lenders had largely the same

underwriting standards across the country. However, because the results using the full LS data are more

precisely estimated and consistent across specifications, I leave them as my primary results.

7 Conclusion

7.1 Findings
 This paper has identified four trends in subprime mortgage underwriting standards by decomposing the

determinants of credit spreads and underwriting limits by borrower characteristics, lender characteristics, time

and geography using unique data on the supply of mortgage credit. First, in support of the HPA hypothesis,

lenders were more sensitive to risk factors related to house prices and less sensitive to risk factors related to

ability to repay for subprime borrowers as compared to prime borrowers, which is evidence that their credit risk

was largely their sensitivity to house prices. Second, in support of the O-to-D hypothesis, lenders that were

owned by investment banks and lenders that imploded were looser across the board and likely lending more

than other lenders, which indicates that securitization may have lowered their underwriting standards. Third,

consistent with both hypotheses, lenders became much tighter from January 2007 to May 2008 as both the

market for mortgage-backed securities dried up and house prices plummeted around the country. Fourth, as a

caveat to the O-to-D hypothesis, lenders did not have meaningfully different underwriting standards across the

country, which is evidence that low underwriting standards did not fuel regional housing bubbles. Collectively,

these results indicate that underwriting standards may have had an important but nuanced role in the recent

increase in foreclosures by subprime borrowers. By allowing subprime borrowers to buy houses even though

their ability to repay was largely contingent on house prices while simultaneously not moderating their

underwriting standards in the face of nonsensical house prices, lenders enabled an inevitable increase in

foreclosures when house prices eventually fell.

7.2 Unanswered questions

The biggest shortcoming of the LS data is that it does not observe mortgage offers from 2005 to 2006 during

the peak of the subprime lending boom and when most of the mortgages that defaulted in the past several years

were originated. By estimating trends in underwriting standards after the bust, this paper has attempted to

diagnose what may have been the problem with mortgages originated during the boom, but it is impossible to

determine if this paper’s results also hold for the crucial period before the beginning of the LS data in January

2007. In particular, did lenders always realize that the credit risk of subprime borrowers was their sensitivity to

house prices and did lenders always ignore house price appreciation or were these responses to the financial

crisis?

Ultimately, this paper clarifies the empirical claims of the HPA and O-to-D hypothesis with respect to

underwriting standards, but it also raises some new questions. Given that certain lenders were much more

aggressive than others in underwriting mortgages to less creditworthy borrowers, what type of regulation can
prevent irresponsible lending without unduly restricting access to mortgage credit? Given that subprime

mortgage underwriting standards trended tighter over time, did this tightening cause or react to tightening in

other consumer credit vehicles like credit cards or auto loans? Most importantly, given that it seems house price

declines have caused foreclosures by subprime borrowers, but geographic variation in underwriting standards

did not fuel these regional housing bubbles and subsequent busts, what did?
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Table 1 – Variable descriptions and sources
Note: All italicized words in this paper have explicit definitions here. All variables that were appended to the LS data have their
sources listed.
Underwriting variables
Spread (bps)
Max LTV (% pts)
Max DTI (% pts)
Max Cash-out ($1000's)
Credit risk variables
LTV (% pts)
Credit Score
I Stated Income (indicator)
DTI (% pts)
I Subprime (indicator)
Mortgage variables
Loan Amount ($1000’s)
Monthly Payment ($1000's)
I Second Mortgage (indicator)
I Amortization Type (indicator)
I Prepayment Penalty (indicator)
I Maturity (indicator)
Borrower variables
Monthly Income ($1000's)
Monthly Interest ($1000's)
Gross Disposable Income
($1000's)
x-day Late Notices (#)
Chargeoffs ($1000's)
Open Collections ($1000's)
Weighted average interest rate less the 10-year Treasury rate, the interest rate
must be a weighted average to adjust for offers that include a combination of a
first and second mortgage with different interest rates (observations with values
greater than 2500 are dropped)
An offer’s maximum allowable loan-to-value ratio (LTV)
An offer’s maximum allowable interest coverage or, in industry terms, debt-to-
income ratio (DTI)
An offer’s maximum amount of home equity that a borrower can cash out in a
subsequent refinancing (by taking out a larger mortgage)
Borrower’s loan-to-value ratio, = Loan Amount / Property Value (observations
with values greater than 115 are dropped)
Average of borrower’s Experian, Equifax and TransUnion credit scores (values of
0 are assumed to be missing, observations with values not between 500 and 850,
the possible range of a credit score, are dropped)
Indicator if the borrower did not offer income documentation (a W2, 1099 or
paystubs)
A borrower’s interest coverage ratio or, in industry terms, the debt-to-income
ratio, = (Monthly Interest + Monthly Payment) / Monthly Income
Indicator if a borrower’s average credit score (Credit Score) is less than or equal
to 620
Offer’s total loan amount, the sum of the amount of the two mortgages if the
offer includes a second mortgage, otherwise the amount of the first mortgage
(observations with values less than 10 are dropped)
Amount of the offer’s monthly payments
Indicator if the offer includes a first and second mortgage
Indicator for the mortgage’s type of amortization schedule (can be “No
Amortization,” “Partial Amortization” or “Standard Amortization”)
Indicator if the borrower query only includes mortgages with a certain
prepayment penalty period (can be “None,” “1 year,” “2 year,” “3 year,” “4 year”
or “Any”)
Indicator for the maturity of the mortgage (can take 19 values, the most frequent
being “30 years,” “20 years” and “2/28”)
Amount of the borrower’s monthly income (observations with values less than .2
or greater than 75 are dropped)
Amount of the borrower’s monthly non-mortgage interest payments (for
example, credit cards or auto loans)
Amount of the borrower’s annual disposable income (values of 0 are assumed to
be missing, observations with values greater than 200 are dropped)
Number of x-day late notices on mortgages in the last year on borrower’s credit
record (x can be 30, 60, 90 or 120)
Amount of chargeoffs (unrecoverable debts) on borrower’s credit record
Amount of open collections (outstanding debts) on borrower’s credit record

Tradelines (#)
I Chapter x Bankruptcy (indicator)
I Notice of Default (indicator)
I First-time Homebuyer (indicator)
I Employment Type (indicator)
I Purpose (indicator)
Property variables
Property Value ($1000’s)
I Property Type (indicator)
I Residency Type (indicator)
I Rural (indicator)
Lender variables
I Lender (indicator)
I Investment Bank (indicator)
Date of implosion (date)
I Implosion (indicator)
Global variables
Date (date)
I Month (indicator)
I State (indicator)
I Division (indicator)
I Region (indicator)
Treasury rate x (bps)
HPA x t (% pts)
Number of tradelines (debts that have been reported to be paid back by
creditors) on borrower’s credit record
Indicator if the borrower has declared Chapter x bankruptcy in the last 10 years
(x can be 7, 11 or 13)
Indicator if the borrower has defaulted on a mortgage in the last 10 years
Indicator if the borrower is a first-time homebuyer
Indicator for borrower’s employment type (can be “Salaried Employee,” “Hourly
Employee” or “Self-Employed”)
Indicator for the purpose of the mortgage (can be “Purchase,” “Refinance” or
“Cash-out”)
Property value
Indicator for the property type (can take 9 values with the most common being
“One Family,” “Two Family” and “Lo Rise”)
Indicator for the borrower’s residency type (can be “Primary Residence,”
“Secondary Residence” or “Investment Property”)
Indicator if the property is in a rural area
Indicator for the lender making the offer (56 lenders in total, the most frequent
being “BNC Mortgage,” “Option One,” and “Decision One”)
Indicator if the lender is owned by an investment bank, Source: SEC 10-K filings
The first date a lender stops accepting loan applications, fires more than 80% of
its workforce or files for bankruptcy, Source: Mortgage Lender Implode-O-
Meter and Factiva
Indicator if the lender is no longer operating, Date of implosion is non-missing,
Source: Implode-O-Meter and Factiva
Date of offer (ranges from 1/31/2007 to 5/30/2008, two large blocks of offers
that had the exact same date and search time needed to be updated with new
data from LoanSifter as this variable was improperly recorded, observations
with values past 5/30/2008 are dropped due to data sparsity)
Indicator for the month in which the offer was made (ranges from January 2007
to May 2008)
Indicator for the state in which the property resides (can take 50 values, the
most common being “Wisconsin,” “California” and “New York”)
Indicator for the Census division in which the property resides (can take 9
values), Source: Census Bureau
Indicator for the Census region in which the property resides (can take 4 values),
Source: Census Bureau
Daily implied interest rate on Treasury debt with maturity x (x can range from
“1-month” to “30-year,” for weekends and trading holidays the most recent
implied interest rate is used), Source: Federal Reserve
House price appreciation in geographic region x for period t (x can be one of 50
states, 9 Census divisions or 4 Census regions and t can be 2004 – 2006 or
2007), Source: Office of Federal Housing Enterprise Oversight
Table 2 – Selected borrower-level summary statistics
Note: Some sets of indicator variables do not sum to 1 because only selected ones are listed and because of rounding. All variables
have 8123 observations.

Mean Std Dev Min 5%ile Median 95%ile Max

LTV 74.65 19.33 5 50 80 100 100

Credit Score 667.05 77.90 500 540 665 800 850
I Stated Income 0.31 0.46 0 0 0 1 1
I Subprime 0.28 0.45 0 0 0 1 1

Monthly Income 7.09 12.75 1 3 4 15 75

Monthly Interest 1.13 2.13 0 0 1 3 50
Gross Disposable Income 12.15 36.30 1 1 5 50 200

30-day Late Notices 0.22 0.79 0 0 0 1 10

60-day Late Notices 0.05 0.39 0 0 0 0 3
90-day Late Notices 0.01 0.14 0 0 0 0 3
120-day Late Notices 0.01 0.09 0 0 0 0 3

Chargeoffs 0.01 0.30 0 0 0 0 14

Open Collections 0.02 0.34 0 0 0 0 22
Tradelines 4.80 2.45 0 0 5 9 10

I Chapter 7 Bankruptcy 0.01 0.08 0 0 0 0 1

I Chapter 11 Bankruptcy 0.01 0.07 0 0 0 0 1
I Chapter 13 Bankruptcy 0.01 0.06 0 0 0 0 1
I Notice of Default 0.03 0.09 0 0 0 0 1

I First-time Homebuyer 0.11 0.31 0 0 0 1 1

I Salaried Employee 0.83 0.38 0 0 1 1 1

I Hourly Employee 0.15 0.36 0 0 0 1 1
I Self-Employed 0.02 0.14 0 0 0 0 1

I Purchase 0.68 0.50 0 0 1 1 1

I Refinance 0.24 0.31 0 0 0 1 1
I Cash-out 0.07 0.25 0 0 0 1 1

Loan Amount 230.59 166.99 11 80 181 575 2000

Property Value 322.12 275.00 20 105 250 750 2000

I One-family Home 0.88 0.33 0 0 1 1 1

I Two-family Home 0.06 0.24 0 0 0 1 1
I Three-family Home 0.02 0.13 0 0 0 0 1
I Four-family Home 0.01 0.11 0 0 0 0 1
I Hi-rise 0.00 0.06 0 0 0 0 1
I Lo-rise 0.02 0.12 0 0 0 0 1
I Manufactured Home 0.01 0.08 0 0 0 0 1
I Modular Home 0.00 0.03 0 0 0 0 1
I Town House 0.01 0.08 0 0 0 0 1

I Primary Residence 0.92 0.28 0 0 1 1 1

I Secondary Residence 0.06 0.24 0 0 0 1 1
I Investment Property 0.02 0.14 0 0 0 0 1

I Rural 0.04 0.19 0 0 0 0 1

Table 3 – Selected offer-level summary statistics
Note: Some sets of indicator variables do not sum to 1 because only selected ones are listed and because of rounding. All variables
have 373,206 observations.

Mean Std Dev Min 5%ile Median 95%ile Max

Underwriting variables

Spread 368.51 110.51 22 226 322 580 937

Max LTV 97.53 5.80 55 75 85 100 100
Max DTI 51.82 2.84 50 50 50 55 60
Max Cash-out 135.49 138.09 0 0 0 500 500

Credit risk variables

LTV 60.21 15.87 5 50 50 90 100

Credit Score 698.66 57.64 500 599 693 800 850
I Stated Income 0.54 0.50 0 0 1 1 1
DTI 34.42 9.91 1 13 36 48 69
I Subprime 0.14 0.28 0 0 0 1 1

Mortgage variables

Loan Amount 147.42 90.36 11 100 100 300 2000

Monthly Payment 1.08 0.75 0 1 1 2 13
I Second Mortgage 0.03 0.17 0 0 0 0 1

I No Amortization 0.21 0.41 0 0 0 1 1

I Partial Amortization 0.30 0.46 0 0 0 1 1
I Standard Amortization 0.49 0.50 0 0 0 1 1

I Any Prepayment Penalty 0.90 0.15 0 0 1 1 1

I No Prepayment Penalty 0.05 0.15 0 0 0 0 1
I 1-year Prepayment Penalty 0.01 0.06 0 0 0 0 1
I 2-year Prepayment Penalty 0.02 0.06 0 0 0 0 1
I 3-year Prepayment Penalty 0.01 0.05 0 0 0 0 1
I 4-year Prepayment Penalty 0.01 0.01 0 0 0 0 1

I Adjustable Rate Mortgage 0.43 0.50 0 0 0 1 1

I Fixed Rate Mortgage 0.57 0.50 0 0 1 1 1

Borrower variables

Monthly Income 6.76 6.05 1 5 5 15 75

Monthly Interest 0.97 0.56 0 0 1 1 50
Gross Disposable Income 24.74 30.60 1 2 50 50 200

30-day Late Notices 0.16 0.33 0 0 0 1 10

60-day Late Notices 0.03 0.17 0 0 0 0 3
90-day Late Notices 0.01 0.05 0 0 0 0 3
120-day Late Notices 0.00 0.02 0 0 0 0 3

Chargeoffs 0.01 0.30 0 0 0 0 14

Open Collections 0.02 0.34 0 0 0 0 22
Tradelines 4.80 2.45 0 0 5 9 10

I Chapter 7 Bankruptcy 0.01 0.05 0 0 0 0 1

I Chapter 11 Bankruptcy 0.01 0.04 0 0 0 0 1
I Chapter 13 Bankruptcy 0.01 0.05 0 0 0 0 1
I Notice of Default 0.02 0.09 0 0 0 0 1
 Mean Std Dev Min 5%ile Median 95%ile Max

I First-time Homebuyer 0.08 0.25 0 0 0 1 1

I Salaried Employee 0.93 0.25 0 0 1 1 1

I Hourly Employee 0.07 0.25 0 0 0 1 1
I Self-Employed 0.00 0.05 0 0 0 0 1

I Purchase 0.66 0.50 0 0 1 1 1

I Refinance 0.26 0.31 0 0 0 1 1
I Cash-out 0.07 0.25 0 0 0 1 1

Property variables

Property Value 244.02 153.59 20 180 200 400 2000

I One-family Home 0.87 0.33 0 0 1 1 1

I Two-family Home 0.06 0.24 0 0 0 1 1
I Three-family Home 0.02 0.13 0 0 0 0 1
I Four-family Home 0.01 0.11 0 0 0 0 1
I Hi-rise 0.00 0.06 0 0 0 0 1
I Lo-rise 0.02 0.12 0 0 0 0 1
I Manufactured Home 0.01 0.08 0 0 0 0 1
I Modular Home 0.00 0.03 0 0 0 0 1
I Town House 0.01 0.08 0 0 0 0 1

I Primary Residence 0.92 0.28 0 0 1 1 1

I Secondary Residence 0.06 0.24 0 0 0 1 1
I Investment Property 0.02 0.14 0 0 0 0 1

I Rural 0.04 0.19 0 0 0 0 1

Lender variables

I Investment Bank 0.37 0.42 0 0 0 1 1

I Implosion 0.93 0.23 0 0 1 1 1

Global variables

Treasury rate 1-month 480.80 63.24 26 342 498 524 527

Treasury rate 3-month 483.16 58.73 61 359 500 518 519
Treasury rate 6-month 491.54 54.43 120 394 506 516 518
Treasury rate 1-year 482.07 52.64 132 386 494 508 510
Treasury rate 2-year 463.49 51.49 135 370 473 501 510
Treasury rate 3-year 458.94 48.81 152 373 467 503 513
Treasury rate 5-year 460.45 39.55 223 399 464 505 518
Treasury rate 7-year 464.02 33.82 271 415 467 507 521
Treasury rate 10-year 471.47 26.77 334 437 469 511 526
Treasury rate 20-year 495.71 19.56 415 470 493 530 544
Treasury rate 30-year 487.57 18.86 417 462 486 522 535

HPA State 2004 — 2006 18.49 8.42 5.79 12.07 14.26 31.82 44.54
HPA State 2007 1.96 2.48 -1.60 -0.30 1.14 2.26 4.84

HPA Division 2004 — 2006 14.01 5.33 6.88 7.67 11.24 13.41 16.34
HPA Division 2007 1.31 1.57 -0.99 0.33 1.26 2.44 3.12

HPA Region 2004 – 2006 13.49 1.42 10.15 - - - 15.77

HPA Region 2007 1.52 0.82 0.89 - - - 2.53
Table 4 – Typical borrower in the LS data as compared to typical US consumer
Note: The 2004 Survey of Consumer Finances is the most recently released version. All dollar amounts are in 2007 dollars and are
rounded to the nearest ten.

LS Data

Mean Median Source

Average credit score 667 665 LS data

Annual income (I Stated Income = 0) $58,590 $48,400 LS data
Annual income (I Stated Income = 1) $89,120 $64,770 LS data
Annual non-mortgage interest payments $13,560 $12,470 LS data

Nationwide

Mean Median Source

Credit score 693 680 Fair Issac’s Annual Report (2007)

Annual income $71,120 $63,570 Survey of Consumer Finances (2004)
Annual non-mortgage interest payments $11,130 $10,670 Survey of Consumer Finances (2004)
Table 5 – Borrower-level summary statistics divided by borrower type, time and geography
Note: For ease of presentation, standard errors are not displayed. The t-statistics displayed are two-sided tests of equality and are
computed using non-pooled standard errors.

Mean Mean T-stat Mean Mean T-stat Mean Mean T-stat

Pre-July Post-July Non-
Prime Subprime Wisconsin
2007 2007 Wisconsin

LTV 73.50 77.55 -3.71*** 74.78 74.45 0.76 75.60 73.95 2.84**
Credit Score 702.82 576.42 12.61*** 673.37 657.46 1.54 655.23 683.31 -2.80***
I Stated Income 0.21 0.35 -4.01*** 0.36 0.23 3.63*** 0.33 0.29 0.95
I Subprime 0.00 1.00 - 0.26 0.32 -1.56 0.32 0.23 2.72***

Monthly Income 7.24 6.70 1.20 6.35 8.20 -1.34 8.27 5.46 2.51***
Monthly Interest 1.22 0.92 1.21 1.05 1.26 -0.83 1.26 0.95 1.13
Gross Disposable Income 20.68 8.21 3.19*** 21.89 19.97 0.55 11.74 24.60 -3.74***

30-day Late Notices 0.13 0.47 -9.83*** 0.23 0.22 0.53 0.24 0.20 1.53
60-day Late Notices 0.02 0.13 -7.43*** 0.04 0.06 -0.77 0.06 0.04 0.89
90-day Late Notices 0.01 0.02 -0.91 0.01 0.00 0.86 0.01 0.01 0.64
120-day Late Notices 0.00 0.01 -3.82*** 0.01 0.01 0.46 0.01 0.01 -0.07

Chargeoffs 0.01 0.05 -5.93*** 0.01 0.01 0.31 0.01 0.01 0.76
Open Collections 0.02 0.04 -2.06*** 0.02 0.02 0.23 0.02 0.02 0.23
Tradelines 4.87 5.02 -1.61 4.62 4.80 -0.56 5.15 4.12 1.36

I Chapter 7 Bankruptcy 0.00 0.02 -2.41*** 0.01 0.01 -0.23 0.01 0.01 0.69
I Chapter 11 Bankruptcy 0.00 0.01 -1.98** 0.01 0.01 0.33 0.01 0.01 0.61
I Chapter 13 Bankruptcy 0.00 0.01 -2.22*** 0.01 0.01 0.66 0.01 0.01 0.79
I Notice of Default 0.02 0.05 -3.01*** 0.02 0.03 -0.87 0.03 0.02 0.60

I First-time Homebuyer 0.10 0.14 -2.50*** 0.11 0.12 -0.40 0.14 0.07 3.61***

I Salaried Employee 0.83 0.82 0.32 0.83 0.81 0.52 0.78 0.88 -1.61
I Hourly Employee 0.15 0.15 0.73 0.15 0.16 -0.15 0.19 0.11 3.76***
I Self-Employed 0.02 0.03 -0.71 0.02 0.03 -1.03 0.03 0.01 2.51***

I Purchase 0.79 0.58 3.71*** 0.69 0.67 0.88 0.68 0.70 -0.84
I Refinance 0.16 0.31 -5.71*** 0.24 0.25 -0.31 0.22 0.26 -0.96
I Cash-out 0.05 0.11 -3.71*** 0.06 0.08 -0.91 0.09 0.04 2.76***

Loan Amount 231.52 228.25 0.83 223.81 240.87 -1.35 185.08 263.66 -4.61***
Property Value 325.75 312.92 0.61 308.74 342.40 -1.73 266.11 362.81 -5.72***

I One-family Home 0.88 0.86 0.96 0.87 0.88 -0.76 0.88 0.88 0.72
I Two-family Home 0.06 0.08 -0.71 0.06 0.07 -0.84 0.05 0.08 -1.67
I Three-family Home 0.02 0.01 1.01 0.02 0.01 0.85 0.02 0.01 0.43
I Four-family Home 0.01 0.00 1.07 0.01 0.01 0.27 0.01 0.01 0.72
I Hi-rise 0.00 0.00 -0.31 0.00 0.00 0.42 0.00 0.00 0.87
I Lo-rise 0.01 0.02 -0.71 0.02 0.01 0.99 0.02 0.01 0.73
I Manufactured Home 0.00 0.01 -0.81 0.01 0.01 -0.75 0.01 0.00 0.93
I Modular Home 0.00 0.00 0.07 0.00 0.00 0.72 0.00 0.00 -0.68
I Town House 0.00 0.01 -0.82 0.01 0.01 0.35 0.01 0.00 1.20

I Primary Residence 0.91 0.94 -0.72 0.91 0.92 -0.41 0.92 0.91 0.82
I Secondary Residence 0.07 0.04 1.70 0.06 0.06 0.05 0.06 0.07 -0.83
I Investment Property 0.02 0.02 0.83 0.02 0.01 1.09 0.02 0.02 0.72

I Rural 0.04 0.02 1.82 0.05 0.02 2.02** 0.05 0.02 2.42***
Table 6 – Largest lenders in the LS data as compared to largest lenders nationwide
Note: The first table shows the 10 largest lenders in the LS data by number of offers. The second table shows the 10 largest subprime
lenders in 2006 by subprime origination.

Top 10 lenders in the LS data

Lender Offers in LS data % of LS data

BNC Mortgage 54,301 14.55%
Option One 28,102 7.53%
Decision One 22,728 6.09%
Saxon 22,429 6.01%
Long Beach Mortgage 19,145 5.13%
Resmae Mortgage 17,615 4.72%
Chase 17,466 4.68%
Countrywide 16,159 4.33%
CreveCor Mortgage 15,525 4.16%
Argent Mortgage 14,293 3.83%

Total Offers in the LS data 373,206 -

Top 10 subprime lenders nationwide

Subprime originations
Lender in 2006 ($MM) Market share
Decision One $52,800 8.25%
New Century $51,600 8.06%
Countrywide $40,596 6.34%
Citi Residential Lending $38,040 5.94%
Fremont Investment $32,300 5.05%
Option One $28,792 4.50%
First Franklin $27,666 4.32%
Long Beach Mortgage $18,602 2.91%
Argent Mortgage $16,723 2.61%
BNC Mortgage $13,157 2.06%

Total Subprime Originations $640,000 -

Table 7 – List of lenders in the LS data
Note: Date of implosion is defined as the first date on which a lender ceases accepting loan applications, fires more than 80% of its
workforce or files for bankruptcy. Lenders in bold are the 10 largest lenders in the LS data.

Lender Name Date of Implosion Investment Bank Ownership

Acceleron 4/2/2007 -
Accredited - -
Act Mortgage Capital 6/29/2007 -
Alternative Lending 5/23/2008 -
Argent Mortgage 10/2/2007 Citigroup (as of 8/31/2007)
BNC Mortgage 8/22/2007 Lehman Brothers
BayRock Mortgage 12/6/2007 -
Bear Stearns Residential 5/19/2008 Bear Stearns
Capital Direct 9/17/2007 -
Chase - JPMorgan
Citi Residential Lending 5/9/2008 Citigroup
Consolidated Lenders 4/30/2007 -
Countrywide 11/20/2007 -
CreveCor Mortgage 4/28/2007 Deutsche Bank
DB Home Lending 7/3/2007 -
Decision One 9/26/2007 HSBC
Delta Funding 12/7/2007 -
Dollar Mortgage 7/31/2007 -
Encore Credit 5/19/2008 Bear Stearns (as of 2/12/2007)
EquiFirst 4/15/2008 Barclays (as of 4/2/2007)
Equity Funding Group 7/20/2007 -
Fieldstone Mortgage 8/10/2007 -
First Choice Mortgage 7/30/2007 -
First Franklin 2/11/2008 Merrill Lynch
First NLC 1/14/2008 -
Fremont Investment 3/8/2007 -
Guaranteed Rate - -
Home Capital Funding 8/2/2007 -
HomeView Lending 8/16/2007 -
Indymac Bank 7/18/2007 -
Ion Capital 3/21/2007 -
Long Beach Mortgage 7/31/2007 Washington Mutual
M&I Home Lending 2/6/2008 -
MILA 2/16/2007 -
MLSG 8/8/2007 -
Master Financial 3/15/2007 -
New Century 3/12/2007 -
Newmark Lending - -
One Choice Mortgage 4/7/2008 -
Option One 12/6/2007 -
People’s Choice 4/2/2007 -
Platinum Capital Group 3/6/2007 -
Popular Financial 1/31/2007 -
Preferred Capital - -
Residential Capital - -
Resmae Mortgage 11/7/2007 -
Saxon 11/20/2007 Morgan Stanley
SouthStar Funding 4/4/2007 -
Superior Mortgage - -
TLP Funding - -
US Bank - -
USA Funding 2/29/2008 -
WMC Mortgage 1/2/2008 -
Washington Mutual 11/21/2007 -
Wilmington Finance 5/1/2008 -
Zone Funding 4/4/2007 -
Table 8 – Determinants of credit spread by borrower type
Note: All regressions include a constant, but its coefficient is not reported. All standard errors are heteroskedastically-robust and clustered at
the I Lender level. Regression (1) includes the following unreported controls: I Lender, I Month and I State. Regressions (2) – (6) include: Max LTV,
Max DTI, Max Cash-out, I Second Mortgage, I Maturity, Gross Disposable Income, Chargeoffs, Open Collections, Tradelines, I Chapter x Bankruptcy, I Notice of
Default, I First-time Homebuyer, I Purpose, I Property Type, I Rural, I Lender, I Month, I State and Treasury Rate x, x ≠ 10-year. The following indicators are not included
in regressions (2) – (6) and therefore constitute the baseline effect within their respective sets of indicators: I Credit Score > 699, I Loan Amount <= 50, I
Any Prepayment Penalty, I Standard Amortization, I Self-Employed and I Primary Residence. Statistical significance at the 1%, 5% and 10% levels is indicated by ***, **
and *, respectively.
(1) (2) (3) (4) (5) (6)
Spread Spread Spread Spread Spread Spread
76.47*** 15.57 20.92*** 8.449 -5.681 -7.41
I Subprime
(14.74) (10.72) (8.04) (14.91) (5.800) (23.24)
2.358***
LTV
(0.260)
-0.284* -0.273 -0.256* -0.282* -0.365**
LTV LTV <= 65
(0.146) (0.192) (0.148) (0.149) (0.181)
0.0966 0.135 0.175 0.0968 0.111
LTV 65 < LTV <= 70
(0.147) (0.166) (0.167) (0.148) (0.164)
0.163 0.113 0.227 0.166 0.0987
LTV 70 < LTV <= 75
(0.128) (0.147) (0.140) (0.132) (0.147)
0.530*** 0.400*** 0.580*** 0.528*** 0.380**
LTV 75 < LTV <= 80
(0.144) (0.149) (0.158) (0.149) (0.149)
1.112*** 1.015*** 1.161*** 1.105*** 1.000***
LTV 80 < LTV <= 85
(0.216) (0.211) (0.233) (0.221) (0.212)
1.425*** 1.289*** 1.470*** 1.414*** 1.281***
LTV 85 < LTV <= 90
(0.205) (0.222) (0.219) (0.210) (0.220)
1.911*** 1.776*** 1.956*** 1.908*** 1.769***
LTV 90 < LTV <= 95
(0.219) (0.213) (0.233) (0.223) (0.212)
2.408*** 2.350*** 2.473*** 2.396*** 2.347***
LTV 95 < LTV <= 100
(0.153) (0.178) (0.162) (0.160) (0.181)
0.653* 0.969**
I Subprime * LTV LTV <= 65
(0.379) (0.365)
0.294 0.547*
I Subprime * LTV 65 < LTV <= 70
(0.313) (0.326)
0.716*** 0.868***
I Subprime * LTV 70 < LTV <= 75
(0.265) (0.266)
0.897*** 1.032***
I Subprime * LTV 75 < LTV <= 80
(0.252) (0.265)
0.781*** 0.905***
I Subprime * LTV 80 < LTV <= 85
(0.280) (0.297)
0.868*** 0.975***
I Subprime * LTV 85 < LTV <= 90
(0.227) (0.238)
0.984*** 1.083***
I Subprime * LTV 90 < LTV <= 95
(0.262) (0.291)
1.098** 1.015***
I Subprime * LTV 95 < LTV <= 100
(0.267) (0.282)
-0.781***
Credit Score
(0.0269)
287.7*** 287.3*** 286.5*** 288.6*** 289.0***
I Credit Score <= 519
(14.02) (15.81) (15.04) (15.36) (16.06)
226.9*** 234.0*** 228.8*** 229.4*** 234.8***
I 519 < Credit Score <= 539
(11.59) (13.98) (11.81) (12.34) (14.75)
193.6*** 194.8*** 191.4*** 195.4*** 192.8***
I 539 < Credit Score <= 559
(5.211) (8.690) (6.161) (6.618) (8.598)
170.0*** 168.0*** 167.4*** 172.8*** 167.5***
I 559 < Credit Score <= 579
(7.718) (10.15) (8.606) (8.384) (9.761)
139.4*** 136.7*** 137.5*** 142.3*** 134.6***
I 579 < Credit Score <= 599
(4.911) (7.485) (6.102) (5.789) (6.889)
93.70*** 92.77*** 91.56*** 96.83*** 90.12***
I 599 < Credit Score <= 619
(5.134) (6.913) (6.236) (6.303) (6.515)
65.39*** 69.97*** 66.09*** 65.54*** 68.15***
I 619 < Credit Score <= 639
(2.756) (3.112) (3.015) (2.880) (3.188)
28.94*** 29.95*** 28.23*** 28.91*** 28.57***
I 639 < Credit Score <= 659
(2.632) (2.628) (2.748) (2.674) (2.822)
25.81*** 28.72*** 25.89*** 25.63*** 27.54***
I 659 < Credit Score <= 679
(4.034) (3.895) (4.033) (3.985) (3.807)
11.79*** 9.975*** 10.43*** 10.38*** 8.810***
I 679 < Credit Score <= 699
(3.270) (3.087) (3.204) (3.353) (3.054)
61.80*** 58.98*** 61.31*** 57.33*** 55.28*** 57.97***
I Stated Income
(7.006) (9.197) (9.217) (9.292) (10.52) (10.14)
0.280** 0.832*** 0.791*** 0.769*** 0.774*** 0.824***
DTI
(0.124) (0.113) (0.104) (0.108) (0.118) (0.116)
0.917*** 0.902*** 0.958*** 1.118*** 1.036***
I Stated Income * DTI
(0.253) (0.258) (0.260) (0.309) (0.299)
19.03 23.25
I Subprime * I Stated Income
(17.28) (15.38)
-0.681*** -0.669***
I Subprime * DTI
(0.114) (0.148)
-1.090*** -1.239***
I Subprime * I Stated Income * DTI
(0.461) (0.352)
 (1) (2) (3) (4) (5) (6)
-9.057 -15.60 -6.116 -8.073 -2.245
I 50 < Loan Amount <= 75
(11.44) (12.36) (13.78) (11.50) (14.25)
-48.98*** -50.75*** -50.19*** -49.08*** -52.51***
I 75 < Loan Amount <= 100
(12.40) (12.52) (13.18) (12.22) (13.05)
-68.96*** -69.54*** -71.65*** -68.85*** -70.26***
I 100 < Loan Amount <= 125
(13.91) (14.01) (15.07) (13.70) (14.86)
-78.51*** -77.04*** -89.18*** -77.94*** -84.34***
I 125 < Loan Amount <= 175
(16.15) (15.96) (14.76) (15.89) (14.16)
-85.32*** -85.80*** -93.16*** -85.02*** -92.28***
I 175 < Loan Amount <= 225
(16.42) (16.08) (15.53) (16.18) (15.10)
-106.9*** -103.9*** -113.6*** -106.3*** -108.9***
I 225 < Loan Amount <= 417
(17.87) (17.30) (16.33) (17.76) (15.51)
-68.5*** -66.6*** -73.1*** -68.7*** -71.0***
I Loan Amount > 417
(18.71) (18.67) (16.64) (18.52) (16.48)
7.631 30.29
I Subprime * I 50 < Loan Amount <= 75
(9.11) (20.86)
-8.474 1.508
I Subprime * I 75 < Loan Amount <= 100
(7.50) (16.38)
-0.342 1.136
I Subprime * I 100 < Loan Amount <= 125
(5.48) (15.06)
43.02*** 37.26***
I Subprime * I 125 < Loan Amount <= 175
(8.12) (13.69)
35.09*** 35.95***
I Subprime * I 175 < Loan Amount <= 225
(8.82) (13.48)
33.30*** 31.16***
I Subprime * I 225 < Loan Amount <= 417
(10.10) (14.80)
27.45*** 28.18**
I Subprime * I Loan Amount > 417
(10.63) (15.91)
12.93*** 13.01*** 12.97*** 12.89*** 19.57***
30-day Late Notices
(2.014) (1.880) (2.003) (2.069) (2.385)
10.02** 11.26** 10.59** 9.721** 9.278
60-day Late Notices
(4.622) (4.882) (4.815) (4.645) (11.32)
65.12*** 75.30*** 63.63*** 65.14*** 130.3***
90-day Late Notices
(19.08) (18.71) (18.43) (18.83) (18.60)
154.2** 162.8** 156.5** 153.7** 360.1***
120-day Late Notices
(71.16) (72.19) (71.61) (70.85) (102.9)
-10.03***
I Subprime * 30-day Late Notices
(2.455)
2.466
I Subprime * 60-day Late Notices
(11.54)
-61.79***
I Subprime * 90-day Late Notices
(22.38)
-257.6**
I Subprime * 120-day Late Notices
(97.17)
91.24*** 91.41*** 91.75*** 91.54*** 84.81***
I No Prepayment Penalty
(7.361) (7.379) (7.285) (7.319) (7.656)
55.15*** 59.19*** 55.60*** 56.04*** 67.66***
I 1-year Prepayment Penalty
(9.153) (9.252) (9.064) (9.274) (10.24)
30.50*** 32.72*** 31.02*** 30.08*** 24.85***
I 2-year Prepayment Penalty
(5.789) (5.833) (5.801) (5.756) (6.427)
10.91** 12.28** 11.24* 10.39* 20.34***
I 3-year Prepayment Penalty
(5.421) (5.280) (5.645) (5.402) (7.058)
-53.80*** -54.58*** -55.37*** -56.97*** -60.25***
I 4-year Prepayment Penalty
(14.89) (12.97) (15.02) (15.10) (13.43)
23.40***
I Subprime * I No Prepayment Penalty
(5.233)
28.33**
I Subprime * I 1-year Prepayment Penalty
(12.14)
12.06
I Subprime * I 2-year Prepayment Penalty
(10.85)
-17.75
I Subprime * I 3-year Prepayment Penalty
(20.15)
1.53
I Subprime * I 4-year Prepayment Penalty
(25.15)
7.932*** 7.943*** 7.943*** 7.799*** 8.916***
I Partial Amortization
(2.854) (2.963) (2.901) (2.879) (2.983)
28.95*** 28.57*** 28.77*** 28.93*** 28.86***
I No Amortization
(1.981) (1.982) (1.978) (1.966) (1.963)
-59.02*** -55.43*** -58.84*** -57.85*** -52.62***
I Salaried Employee
(11.41) (11.16) (11.29) (10.93) (10.38)
2.945 2.666 2.798 2.779 3.386
I Hourly Employee
(3.962) (3.951) (3.979) (4.063) (3.892)
20.01** 29.01*** 19.76** 20.72** 25.96***
I Secondary Residence
(9.652) (10.27) (9.414) (9.353) (9.728)
86.40*** 87.11*** 85.50*** 86.79*** 86.06***
I Investment Property
(12.66) (12.20) (12.94) (12.35) (11.77)

Observations 373206 373206 373206 373206 373206 373206

Adjusted R2 0.570 0.729 0.732 0.730 0.729 0.749
Table 9 – Determinants of credit spread by lender ownership and survival
Note: All regressions include a constant, but its coefficient is not reported. All standard errors are heteroskedastically-robust and clustered at
the I Lender level. All regressions include the following unreported controls: Max LTV, Max DTI, Max Cash-out, I Stated Income * DTI, I Second
Mortgage, I Amortization Type, I Prepayment Penalty, I Maturity, Gross Disposable Income, x-day Late Notices, Chargeoffs, Open Collections, Tradelines, I
Chapter x Bankruptcy, I Notice of Default, I First-time Homebuyer, I Employment Type, I Purpose, I Property Type, I Rural, I Lender, I Month, I State and Treasury Rate x, x ≠ 10-year. The
following indicators are not included and therefore constitute the baseline effect within their respective sets of indicators: I Credit Score > 699 and I
Loan Amount <= 50. Observations from Argent Mortgage, Encore Credit and Equifirst are not included as they were acquired by investment banks
during the sample period. Statistical significance at the 1%, 5% and 10% levels is indicated by ***, ** and *, respectively.
(1) (2) (3) (4) (5) (6) (7)
Spread Spread Spread Spread Spread Spread Spread
-112.8*** -89.83** -107.7*** -150.0*** -113.0*** -119.4*** -119.8***
I Investment Bank (22.73) (25.58) (28.64) (26.44) (22.13) (24.85) (26.02)
-107.6*** -172.4*** -168.0*** -168.8*** -187.6*** -182.0*** -136.5***
I Implosion (28.27) (28.52) (29.72) (28.22) (37.45) (30.05) (29.93)
-0.334 -0.138 -0.310 -0.303 -0.202 -0.306 -0.298
LTV LTV <= 65 (0.244) (0.385) (0.243) (0.249) (0.216) (0.231) (0.239)
0.138 0.275 0.153 0.174 0.222 0.156 0.159
LTV 65 < LTV <= 70 (0.191) (0.258) (0.189) (0.193) (0.166) (0.185) (0.186)
-0.00761 0.0216 0.00498 0.0141 0.0799 0.0169 0.00948
LTV 70 < LTV <= 75 (0.205) (0.286) (0.203) (0.202) (0.179) (0.194) (0.201)
0.316* 0.404 0.329* 0.344* 0.399** 0.340* 0.331*
LTV 75 < LTV <= 80 (0.188) (0.273) (0.182) (0.188) (0.166) (0.181) (0.185)
0.840*** 0.866*** 0.851*** 0.867*** 0.938*** 0.853*** 0.859***
LTV 80 < LTV <= 85 (0.205) (0.273) (0.209) (0.200) (0.182) (0.201) (0.199)
1.129*** 1.218*** 1.142*** 1.152*** 1.228*** 1.139*** 1.144***
LTV 85 < LTV <= 90 (0.211) (0.273) (0.210) (0.200) (0.188) (0.207) (0.208)
1.766*** 1.916*** 1.781*** 1.785*** 1.858*** 1.771*** 1.782***
LTV 90 < LTV <= 95 (0.214) (0.285) (0.209) (0.208) (0.204) (0.212) (0.212)
2.173*** 2.233*** 2.185*** 2.200*** 2.242*** 2.149*** 2.161***
LTV 95 < LTV <= 100 (0.188) (0.215) (0.181) (0.180) (0.185) (0.191) (0.190)
-0.499
I Investment Bank * LTV LTV <= 65
(0.618)
-0.336
I Investment Bank * LTV 65 < LTV <= 70
(0.387)
-0.0620
I Investment Bank * LTV 70 < LTV <= 75
(0.410)
-0.204
I Investment Bank * LTV 75 < LTV <= 80
(0.441)
-0.0753
I Investment Bank * LTV 80 < LTV <= 85
(0.379)
-0.216
I Investment Bank * LTV 85 < LTV <= 90
(0.407)
-0.347
I Investment Bank * LTV 90 < LTV <= 95
(0.464)
-0.0838
I Investment Bank * LTV 95 < LTV <= 100
(0.482)
0.690
I Implosion * LTV LTV <= 65
(0.561)
0.511
I Implosion * LTV 65 < LTV <= 70
(0.363)
0.520
I Implosion * LTV 70 < LTV <= 75
(0.499)
0.914
I Implosion * LTV 75 < LTV <= 80
(0.634)
0.612
I Implosion * LTV 80 < LTV <= 85
(0.412)
0.89
I Implosion * LTV 85 < LTV <= 90
(0.565)
0.601
I Implosion * LTV 90 < LTV <= 95
(0.421)
0.509
I Implosion * LTV 95 < LTV <= 100
(0.412)
265.6*** 267.5*** 271.4*** 276.4*** 267.5*** 264.9*** 264.7***
I Credit Score <= 519 (29.57) (29.64) (32.09) (30.12) (29.08) (31.39) (29.42)
194.8*** 196.5*** 201.1*** 194.7*** 195.6*** 191.8*** 193.5***
I 519 < Credit Score <= 539 (22.11) (22.21) (25.64) (22.45) (22.18) (23.07) (22.20)
197.9*** 179.1*** 179.0*** 178.7*** 197.6*** 187.3*** 178.3***
I 539 < Credit Score <= 559 (12.77) (12.86) (15.75) (12.62) (12.58) (12.43) (12.81)
151.02*** 151.65*** 154.60*** 151.25*** 161.62*** 152.85*** 151.12***
I 559 < Credit Score <= 579 (9.767) (9.802) (13.37) (9.776) (9.572) (8.468) (9.487)
120.77*** 121.26*** 129.33*** 121.18*** 121.54*** 128.30*** 120.72***
I 579 < Credit Score <= 599 (9.561) (9.677) (12.69) (9.708) (9.430) (9.681) (9.591)
105.15*** 105.63*** 106.66*** 105.14*** 105.91*** 109.26*** 105.90***
I 599 < Credit Score <= 619 (8.096) (8.221) (9.650) (8.482) (7.969) (8.009) (8.076)
40.54*** 60.12*** 60.59*** 60.48*** 69.87*** 61.11*** 60.73***
I 619 < Credit Score <= 639 (8.312) (8.336) (9.473) (8.587) (8.269) (8.498) (8.299)
33.28*** 33.36*** 37.61*** 33.13*** 32.52*** 32.19*** 32.89***
I 639 < Credit Score <= 659 (8.839) (8.886) (11.07) (9.189) (8.897) (9.228) (8.930)
12.81 11.11 9.47 12.84 17.96** 12.32 23.94***
I 659 < Credit Score <= 679 (8.101) (7.873) (9.181) (8.071) (8.005) (8.267) (8.142)
8.98 6.96 8.71 6.64 6.21 8.75 6.63
I 679 < Credit Score <= 699 (7.998) (8.075) (11.32) (8.141) (7.924) (8.048) (7.964)
 (1) (2) (3) (4) (5) (6) (7)
-27.60
I Investment Bank * I Credit Score <= 519 (31.35)
-26.25
I Investment Bank * I 519 < Credit Score <= 539 (43.85)
-1.402
I Investment Bank * I 539 < Credit Score <= 559 (29.68)
-8.931
I Investment Bank * I 559 < Credit Score <= 579 (20.63)
-22.98
I Investment Bank * I 579 < Credit Score <= 599 (18.03)
-3.070
I Investment Bank * I 599 < Credit Score <= 619 (15.92)
0.281
I Investment Bank * I 619 < Credit Score <= 639 (16.98)
-13.78
I Investment Bank * I 639 < Credit Score <= 659 (18.84)
7.007
I Investment Bank * I 659 < Credit Score <= 679 (10.62)
-5.938
I Investment Bank * I 679 < Credit Score <= 699 (14.42)
-34.776
I Implosion * I Credit Score <= 519 (44.11)
58.24**
I Implosion * I 519 < Credit Score <= 539 (24.87)
58.19***
I Implosion * I 539 < Credit Score <= 559 (20.22)
2.17
I Implosion * I 559 < Credit Score <= 579 (25.72)
51.00***
I Implosion * I 579 < Credit Score <= 599 (13.48)
13.31
I Implosion * I 599 < Credit Score <= 619 (13.52)
-24.76**
I Implosion * I 619 < Credit Score <= 639 (10.41)
-10.93
I Implosion * I 639 < Credit Score <= 659 (14.39)
-29.62
I Implosion * I 659 < Credit Score <= 679 (20.89)
-3.62
I Implosion * I 679 < Credit Score <= 699 (7.469)
1.648 2.734 0.899 47.01 15.68 0.497 36.02
I 50 < Loan Amount <= 75 (29.35) (28.66) (29.71) (30.80) (28.29) (29.17) (28.05)
-29.49 -27.59 -29.64 5.301 -15.33 -31.21 -11.58
I 75 < Loan Amount <= 100 (26.94) (25.81) (26.94) (33.38) (26.17) (27.02) (30.43)
-47.65* -45.83 -48.29* -14.72 -34.18 -49.71* -26.22
I 100 < Loan Amount <= 125 (28.27) (27.73) (28.48) (36.12) (27.53) (28.23) (31.93)
-58.98* -57.58* -59.39* -23.73 -46.23 -60.71* -42.52
I 125 < Loan Amount <= 175 (30.63) (30.56) (30.73) (42.10) (30.94) (30.45) (35.66)
-85.70*** -84.21*** -86.34*** -54.75** -72.65** -87.84*** -67.81**
I 175 < Loan Amount <= 225 (28.18) (28.21) (28.25) (29.00) (28.23) (28.07) (33.36)
-87.17*** -85.85*** -87.87*** -61.80** -73.42** -89.02*** -70.01*
I 225 < Loan Amount <= 417 (30.15) (30.15) (30.05) (31.02) (30.74) (29.85) (35.57)
-68.98** -67.20** -69.65** -51.06 -59.58** -71.36** -51.63
I Loan Amount > 417 (33.52) (32.85) (33.54) (44.48) (30.91) (33.79) (39.28)
-113.9***
I Investment Bank * I 50 < Loan Amount <= 75 (42.00)
36.45
I Investment Bank * I 75 < Loan Amount <= 100 (22.16)
42.19
I Investment Bank * I 100 < Loan Amount <= 125 (27.50)
35.69
I Investment Bank * I 125 < Loan Amount <= 175 (23.25)
34.56
I Investment Bank * I 175 < Loan Amount <= 225 (24.17)
35.87
I Investment Bank * I 225 < Loan Amount <= 417 (22.41)
73.85**
I Investment Bank * I Loan Amount > 417 (30.76)
113.5
I Implosion * I 50 < Loan Amount <= 75 (86.21)
43.83
I Implosion * I 75 < Loan Amount <= 100 (45.58)
66.66
I Implosion * I 100 < Loan Amount <= 125 (42.90)
32.12
I Implosion * I 125 < Loan Amount <= 175 (55.80)
43.80
I Implosion * I 175 < Loan Amount <= 225 (47.32)
39.56
I Implosion * I 225 < Loan Amount <= 417 (45.49)
33.73
I Implosion * I Loan Amount > 417 (43.60)

F-statistic, H0: I Implosion / Investment 1.04 2.55 26.42 3.24 16.3 3.55
Bank interactions = 0 (0.751) (0.537) (0.000) (0.172) (0.002) (0.169)
Observations 353721 353721 353721 353721 353721 353721 353721
Adjusted R2 0.703 0.704 0.704 0.704 0.704 0.705 0.704
 Table 10 – Determinants of credit spread across time and geography
Note: All regressions include a constant, but its coefficient is not reported. All standard errors are heteroskedastically-robust and clustered at
the I Lender level. All regressions include the following unreported controls: Max LTV, Max DTI, Max Cash-out, I Second Mortgage, I Amortization Type, I
Prepayment Penalty, I Maturity, Gross Disposable Income, Chargeoffs, Open Collections, Tradelines, I Chapter x Bankruptcy, I Notice of Default, I First-time Homebuyer, I
Employment Type, I Purpose, I Property Type, I Rural, I Lender and Treasury Rate x, x ≠ 10-year. Regressions (1) and (4) – (8) also include I State, regression (2)
also includes I Division and regression (3) also includes I Region. The following indicators are not included and therefore constitute the baseline
effect within their respective sets of indicators: I January 2007, I Credit Score > 699 and I Loan Amount <= 50. Statistical significance at the 1%, 5% and 10%
levels is indicated by ***, ** and *, respectively.

(1) (2) (3) (4) (5) (6) (7) (8)

Spread Spread Spread Spread Spread Spread Spread Spread
17.02*** 17.05*** 16.85*** 15.85** 13.29** 15.61** 15.15** 15.67**
I February 2007
(5.057) (4.972) (4.917) (5.066) (5.012) (5.024) (5.127) (5.006)
60.41*** 60.34*** 61.02*** 61.31*** 58.95*** 56.05*** 60.36*** 62.01***
I March 2007
(13.50) (13.55) (13.33) (13.97) (12.69) (12.54) (12.77) (12.85)
47.81** 47.28** 46.04** 50.80** 53.27** 49.38** 52.83** 53.48**
I April 2007
(18.83) (18.88) (18.48) (17.43) (14.20) (14.19) (14.41) (13.99)
39.79** 39.96** 39.64** 44.74** 37.54** 40.48** 38.11** 36.60**
I May 2007
(18.00) (18.82) (18.61) (18.06) (17.40) (17.48) (17.59) (16.76)
119.3*** 118.9*** 121.1*** 135.3*** 124.6*** 120.8*** 138.9*** 134.4***
I June 2007
(23.39) (23.42) (23.40) (32.80) (24.74) (22.67) (26.70) (35.08)
172.1*** 170.4*** 165.5*** 145.6*** 159.8*** 151.6*** 160.6*** 167.9***
I July 2007
(21.70) (21.54) (21.01) (29.85) (20.77) (19.77) (27.21) (33.76)
196.8*** 201.5*** 202.1*** 199.4*** 199.3*** 196.3*** 208.2*** 215.3***
I August 2007
(20.64) (22.06) (23.42) (27.87) (20.66) (20.65) (34.47) (31.28)
173.5*** 174.0*** 173.7*** 175.4*** 171.2*** 177.1*** 204.6*** 207.6***
I September 2007
(20.09) (20.42) (20.32) (26.19) (20.40) (19.31) (31.20) (27.31)
208.1*** 207.6*** 206.5*** 208.5*** 207.0*** 204.5*** 219.6*** 200.7***
I October 2007
(19.48) (19.87) (19.87) (33.00) (26.39) (24.92) (29.72) (32.94)
212.7*** 212.4*** 214.2*** 210.6*** 226.6*** 227.1*** 210.2*** 208.9***
I November 2007
(20.83) (21.74) (22.35) (37.73) (30.70) (29.36) (31.40) (35.64)
239.7*** 240.7*** 236.8*** 242.4*** 249.3*** 208.8*** 212.0*** 239.2***
I December 2007
(27.40) (27.52) (26.72) (42.62) (38.13) (34.71) (36.33) (41.60)
243.3*** 243.6*** 247.7*** 246.8*** 248.6*** 248.4*** 238.3*** 231.6***
I January 2008
(22.24) (22.53) (22.74) (47.67) (42.89) (39.75) (37.13) (49.14)
244.1*** 245.3*** 244.9*** 239.5*** 204.4** 193.11** 191.6*** 222.1***
I February 2008
(21.89) (21.93) (21.60) (51.91) (48.62) (43.15) (35.30) (54.18)
197.9*** 197.8*** 193.4*** 179.97*** 141.02*** 135.02*** 152.6*** 169.6***
I March 2008
(25.39) (25.49) (24.31) (46.47) (41.06) (36.26) (31.02) (50.06)
213.9*** 216.2*** 224.9*** 211.9*** 222.8*** 224.1*** 219.6*** 215.9***
I April 2008
(40.19) (39.77) (38.90) (50.70) (46.26) (41.62) (45.40) (54.64)
204.1*** 205.9*** 199.4*** 213.6*** 184.68*** 183.46*** 195.8*** 197.4***
I May 2008
(35.11) (35.18) (33.41) (48.49) (42.45) (39.45) (43.18) (49.48)
-0.143 -0.125 -0.061 0.0328 -0.198 -0.177 -0.203 -0.195
LTV LTV <= 65
(0.260) (0.215) (0.199) (0.291) (0.241) (0.262) (0.270) (0.294)
0.251 0.215 0.249 0.319 0.110 0.219 0.204 0.167
LTV 65 < LTV <= 70
(0.207) (0.205) (0.226) (0.233) (0.196) (0.205) (0.226) (0.238)
0.170 0.129 0.151 0.161 0.0931 0.127 0.154 0.103
LTV 70 < LTV <= 75
(0.210) (0.197) (0.201) (0.214) (0.204) (0.209) (0.222) (0.208)
0.502** 0.482** 0.501** 0.492** 0.392** 0.440** 0.469** 0.385*
LTV 75 < LTV <= 80
(0.193) (0.158) (0.174) (0.207) (0.183) (0.193) (0.204) (0.213)
0.931*** 0.905*** 0.899*** 0.936*** 0.837*** 0.900*** 0.911*** 0.851***
LTV 80 < LTV <= 85
(0.191) (0.201) (0.198) (0.195) (0.187) (0.189) (0.204) (0.193)
1.243*** 1.153*** 1.163*** 1.231*** 1.174*** 1.203*** 1.226*** 1.166***
LTV 85 < LTV <= 90
(0.203) (0.215) (0.206) (0.216) (0.194) (0.203) (0.216) (0.214)
1.841*** 1.798*** 1.832*** 1.892*** 1.776*** 1.804*** 1.809*** 1.801***
LTV 90 < LTV <= 95
(0.200) (0.203) (0.196) (0.209) (0.192) (0.201) (0.213) (0.208)
2.265*** 2.262*** 2.271*** 2.340*** 2.230*** 2.223*** 2.180*** 2.217***
LTV 95 < LTV <= 100
(0.176) (0.171) (0.178) (0.192) (0.176) (0.179) (0.200) (0.213)
-0.189 -0.667
I Post-July 2007 * LTV LTV <= 65
(0.555) (0.690)
-0.110 -0.685
I Post-July 2007 * LTV 65 < LTV <= 70
(0.455) (0.620)
0.201 -0.378
I Post-July 2007 * LTV 70 < LTV <= 75
(0.396) (0.536)
0.153 -0.408
I Post-July 2007 * LTV 75 < LTV <= 80
(0.391) (0.519)
0.202 -0.346
I Post-July 2007 * LTV 80 < LTV <= 85
(0.356) (0.464)
0.336 -0.277
I Post-July 2007 * LTV 85 < LTV <= 90
(0.438) (0.581)
-0.0728 -0.496
I Post-July 2007 * LTV 90 < LTV <= 95
(0.380) (0.480)
-0.202 -0.736
I Post-July 2007 * LTV 95 < LTV <= 100
(0.376) (0.498)
 (1) (2) (3) (4) (5) (6) (7) (8)
249.9*** 224.5*** 235.6*** 249.2*** 221.8*** 247.3*** 242.5*** 209.3***
I Credit Score <= 519
(25.20) (25.72) (24.78) (26.10) (21.67) (25.02) (25.95) (22.49)
192.9*** 187.3*** 190.5*** 193.4*** 182.7*** 193.6*** 191.6*** 180.2***
I 519 < Credit Score <= 539
(18.64) (19.33) (19.54) (18.84) (16.50) (18.44) (19.02) (16.52)
177.6*** 173.3*** 171.6*** 178.7*** 166.40*** 178.3*** 179.4*** 173.6***
I 539 < Credit Score <= 559
(11.73) (13.62) (12.76) (11.33) (11.67) (11.72) (10.64) (10.95)
149.5*** 152.5*** 157.4*** 146.84*** 140.30*** 149.98*** 148.89*** 147.13***
I 559 < Credit Score <= 579
(9.272) (10.62) (9.673) (9.361) (11.11) (9.146) (8.840) (11.39)
116.1*** 112.1*** 119.2*** 113.98*** 107.71*** 116.22*** 116.78*** 108.69***
I 579 < Credit Score <= 599
(9.615) (9.462) (9.975) (9.829) (9.567) (9.596) (9.745) (10.09)
99.58*** 90.72*** 89.25*** 97.86*** 83.66*** 98.19*** 100.07*** 83.52***
I 599 < Credit Score <= 619
(8.588) (9.472) (7.825) (8.776) (8.397) (8.624) (8.621) (8.574)
60.90*** 62.73*** 50.21*** 56.10** 42.70*** 56.09*** 55.11*** 45.96***
I 619 < Credit Score <= 639
(7.317) (7.772) (8.331) (7.362) (7.414) (7.051) (7.483) (7.531)
30.23*** 26.72*** 35.76*** 32.97*** 10.73 22.81** 25.12*** 8.341
I 639 < Credit Score <= 659
(8.333) (8.772) (8.893) (8.803) (7.975) (7.949) (8.639) (8.077)
8.38 8.26 0.727 7.41 -6.681 7.297 10.469 -4.268
I 659 < Credit Score <= 679
(7.675) (7.267) (8.321) (8.124) (8.554) (7.641) (7.897) (8.501)
2.026 6.722 -4.622 1.561 -6.251 -2.356 4.026 -6.04
I 679 < Credit Score <= 699
(7.774) (7.840) (7.012) (7.881) (8.483) (7.805) (8.041) (8.832)
177.6*** 153.6***
I Post-July 2007 * I Credit Score <= 519
(47.88) (56.43)
24.91 28.59
I Post-July 2007 * I 519 < Credit Score <= 539
(33.08) (43.66)
35.26 17.32
I Post-July 2007 * I 539 < Credit Score <= 559
(30.50) (29.82)
27.91 3.996
I Post-July 2007 * I 559 < Credit Score <= 579
(21.57) (21.68)
17.50 7.234
I Post-July 2007 * I 579 < Credit Score <= 599
(20.13) (18.05)
41.54** 32.35*
I Post-July 2007 * I 599 < Credit Score <= 619
(18.68) (17.16)
62.23*** 49.41***
I Post-July 2007 * I 619 < Credit Score <= 639
(15.27) (15.32)
59.63*** 59.54***
I Post-July 2007 * I 639 < Credit Score <= 659
(14.78) (15.30)
53.58*** 36.67**
I Post-July 2007 * I 659 < Credit Score <= 679
(15.85) (14.82)
23.19 16.02
I Post-July 2007 * I 679 < Credit Score <= 699
(18.44) (14.96)
53.90*** 51.62*** 50.63*** 52.03*** 48.72*** 35.16** 50.40*** 30.88**
I Stated Income
(16.26) (16.05) (19.34) (16.76) (16.43) (16.38) (16.80) (15.47)
92.35*** 82.81***
I Post-July 2007 * DTI
(26.16) (29.03)
1.153*** 1.105*** 1.005*** 1.099*** 1.066*** 0.940*** 1.085*** 0.912***
DTI
(0.162) (0.157) (0.206) (0.157) (0.168) (0.182) (0.161) (0.178)
0.454 0.322
I Post-July 2007 * DTI
(0.300) (0.336)
0.893** 0.864** 0.788* 0.813** 0.704* 1.023** 0.898** 1.100**
I Stated Income * DTI
(0.424) (0.405) (0.519) (0.435) (0.389) (0.468) (0.435) (0.472)
0.890 0.353
I Post-July 2007 * I Stated Income * DTI
(0.798) (0.829)
-7.727 -13.62 -9.453 -8.729 -0.917 -14.68 -6.767 -8.973
I 50 < Loan Amount <= 75
(22.18) (22.51) (22.93) (22.23) (22.30) (20.84) (31.08) (29.98)
-31.87*** -36.26*** -33.83*** -36.91*** -37.36*** -30.83*** -21.57** -26.64***
I 75 < Loan Amount <= 100
(9.469) (9.782) (9.261) (10.31) (9.678) (9.165) (9.346) (9.288)
-48.38*** -39.42*** -51.21*** -48.65*** -48.74*** -45.94*** -19.97* -21.74**
I 100 < Loan Amount <= 125
(11.47) (11.66) (11.34) (11.49) (11.76) (11.49) (11.79) (10.34)
-58.49*** -60.26*** -61.36*** -59.89*** -62.15*** -56.50*** -56.57*** -60.10***
I 125 < Loan Amount <= 175
(13.47) (13.88) (13.22) (14.26) (13.39) (12.78) (12.47) (12.27)
-82.41*** -89.76*** -86.72*** -83.96*** -83.78*** -80.39*** -72.75*** -77.73***
I 175 < Loan Amount <= 225
(12.24) (12.52) (12.67) (12.50) (11.99) (11.61) (10.52) (10.31)
-81.43*** -80.62*** -85.62*** -82.85*** -84.10*** -79.19*** -73.33*** -76.68***
I 225 < Loan Amount <= 417
(13.66) (13.21) (14.01) (14.42) (13.67) (13.21) (11.95) (12.17)
-72.75*** -70.23*** -73.62*** -69.72*** -73.56*** -67.37*** -69.62*** -67.55***
I Post-July 2007 * I Loan Amount > 417
(17.55) (17.52) (17.09) (18.71) (17.99) (17.69) (16.92) (18.37)
-19.38 1.232
I Post-July 2007 * I 50 < Loan Amount <= 75
(45.54) (44.72)
-56.83 -49.14
I Post-July 2007 * I 75 < Loan Amount <= 100
(31.61) (30.46)
-72.71 -62.49
I Post-July 2007 * I 100 < Loan Amount <= 125
(41.09) (41.87)
-14.47 -0.911
I Post-July 2007 * I 125 < Loan Amount <= 175
(20.26) (25.70)
 (1) (2) (3) (4) (5) (6) (7) (8)
-48.19 -29.57
I Post-July 2007 * I 175 < Loan Amount <= 225
(30.46) (26.45)
-41.53 -33.49
I Post-July 2007 * I 225 < Loan Amount <= 417
(25.16) (26.23)
-26.89 -9.274
I Post-July 2007 * I Loan Amount > 417
(23.34) (24.05)
20.32*** 18.62*** 22.90*** 20.67*** 21.58*** 19.65*** 19.88*** 21.91***
30-day Late Notices
(3.062) (3.146) (3.238) (3.135) (3.080) (3.051) (3.046) (3.451)
-7.472 -5.538 1.627 -3.752 -13.03** -3.666 -1.871 15.90
60-day Late Notices
(6.285) (6.285) (5.762) (6.218) (6.434) (5.755) (6.652) (12.05)
146.2*** 159.1*** 160.3*** 159.6*** 161.2*** 163.0*** 155.0*** 30.04
90-day Late Notices
(21.67) (20.52) (24.31) (21.94) (21.32) (23.73) (20.97) (34.90)
273.3*** 268.0*** 322.6*** 262.0*** 264.3*** 272.2*** 272.0*** 277.6***
120-day Late Notices
(53.21) (54.32) (58.49) (54.08) (53.75) (53.18) (54.64) (53.78)
-5.400
I Post-July 2007 * 30-day Late Notices
(6.220)
27.58**
I Post-July 2007 * 60-day Late Notices
(13.12)
154.2***
I Post-July 2007 * 90-day Late Notices
(42.75)
146.7**
I Post-July 2007 * 120-day Late Notices
(65.03)
-2.562
HPA State 2004 – 2006
(2.521)
-1.730
HPA State 2007
(3.261)
-8.421
HPA Division 2004 – 2006
(5.062)
-6.188
HPA Division 2007
(4.601)
-10.82
HPA Region 2004 – 2006
(11.46)
-5.831
HPA Region 2007
(10.97)

I Alabama – I Wyoming (Not

reported)
I New England Division – I Pacific Division (Not
reported)
I Northeast Region – I West Region (Not
reported)

45.76 47.21 48.88

F statistic, H0: I Month = 0
(0.000) (0.000) (0.000)
2.77 3.06 2.33
F statistic, H0: HPA = 0
(0.201) (0.172) (0.264)
311.13 2.88 1.61
F statistic, H0: I State / Division / Region = 0
(0.000) (0.075) (0.194)

Observations 373206 373206 373206 373206 373206 373206 373206 373206

Adjusted R2 0.710 0.652 0.701 0.711 0.713 0.712 0.712 0.723
Table 11 – Determinants of underwriting limits
Note: All regressions include a constant, but its coefficient is not reported. All standard errors are heteroskedastically-robust and clustered at
the I Lender level. All regressions include the following unreported controls: Spread, I Second Mortgage, I Amortization Type, I Prepayment Penalty, I Maturity,
Gross Disposable Income, Chargeoffs, Open Collections, Tradelines, I Chapter x Bankruptcy, I Notice of Default, I First-time Homebuyer, I Employment Type, I Property
Type, I Rural, I Lender, I State and Treasury Rate x, x ≠ 10-year. The following indicators are not included and therefore constitute the baseline effect
within their respective sets of indicators: I Purchase and I January 2007. Statistical significance at the 1%, 5% and 10% levels is indicated by ***, **
and *, respectively.

(1) (2) (3)

Max LTV Max DTI Max Cash-out
0.00308*** 0.00361*** 0.00208
Credit Score (0.00114) (0.000974) (0.0365)
-0.183 -0.293*** -5.289
30-day Late Notices (0.248) (0.0953) (3.183)
-0.240 0.0402 6.095
60-day Late Notices (0.346) (0.120) (6.522)
-0.317 0.890 -61.38**
90-day Late Notices (1.085) (1.083) (25.65)
-2.24 -0.377 1.972
120-day Late Notices (6.488) (0.548) (30.28)
-1.276** -0.260 -23.58**
I Stated Income (0.610) (0.235) (10.23)
-2.661 1.696 -13.6
I Secondary Residence (6.261) (1.062) (45.2)
4.606 0.725 -35.3
I Investment Property
(3.903) (1.962) (62.5)
1.773 2.620 20.6
I Refinance (4.032) (2.065) (18.4)
-4,326 1.693 41.23*
I Cash-out (3.076) (1.604) (21.2)
8.929*** 2.960*** 194.9***
I Investment Bank (1.366) (0.539) (64.76)
7.661*** 3.576*** -13.41
I Implosion (1.760) (0.434) (28.90)
0.241 0.133 4.025
I February 2007 (0.219) (0.176) (11.89)
-1.109 0.127 12.36
I March 2007 (0.664) (0.181) (13.08)
-2.993*** 0.521* 20.29
I April 2007 (0.832) (0.261) (17.63)
-3.124*** 0.832** -1.939
I May 2007 (1.038) (0.354) (26.78)
-1.759 0.0363 66.86*
I June 2007 (1.533) (0.384) (39.86)
-7.170*** -0.0526 34.26
I July 2007 (1.416) (0.332) (27.49)
-6.904*** 0.604 10.26
I August 2007 (1.503) (0.471) (47.24)
-5.091*** 0.307 -21.21
I September 2007 (1.244) (0.485) (50.30)
-3.425** 0.200 36.65
I October 2007 (1.303) (0.572) (45.45)
-3.856** 0.892 32.62
I November 2007 (1.521) (0.612) (43.72)
-1.356 1.230 -37.59
I December 2007 (1.932) (0.790) (95.83)
-2.003 0.808 27.53
I January 2008 (2.034) (0.918) (71.89)
-3.224** 0.558 34.68
I February 2008 (1.368) (1.081) (92.07)
-4.187** 0.0663 22.42
I March 2008 (1.978) (1.050) (97.86)
-5.655*** -0.301 13.03
I April 2008 (1.844) (0.846) (87.26)
-6.475*** -1.184 -17.24
I May 2008 (1.577) (0.735) (87.33)
0.256 0.335 3.105
HPA State 2004 – 2006 (3.105) (.842) (5.393)
-0.453 0.523 -7.394
HPA State 2007 (2.104) (0.429) (6.233)

109.5 23.44 19.43

F statistic, H0: I Month = 0
(0.000) (0.031) (0.114)
0.216 1.06 2.05
F statistic, H0: HPA = 0
(0.882) (0.612) (0.348)
6.31 5.78 8.34
F statistic, H0: I State = 0
(0.477) (0.562) (0.230)

Observations 373206 373206 373206

Adjusted R2 0.573 0.330 0.550
Table 12 – Determinants of credit spreads on cheapest offers
Note: All regressions include a constant, but its coefficient is not reported. All standard errors are heteroskedastically-robust and clustered at
the I Lender level. All regressions include the following unreported controls: Max LTV, Max DTI, Max Cash-out, <Credit Score>, <Loan
Amount>, I Second Mortgage, I Amortization Type, I Prepayment Penalty, I Maturity, Gross Disposable Income, Chargeoffs, Open Collections, Tradelines, I Chapter x
Bankruptcy, I Notice of Default, I First-time Homebuyer, I Employment Type, I Property Type, I Rural, I Lender, I Month, I State and Treasury Rate x, x ≠ 10-year. The following
indicators are not included and therefore constitute the baseline effect within their respective sets of indicators: I January 2007. Statistical
significance at the 1%, 5% and 10% levels is indicated by ***, ** and *, respectively.

(1)
Spread
0.451
LTV LTV <= 65
(0.691)
0.315
LTV 65 < LTV <= 70
(0.498)
0.529
LTV 70 < LTV <= 75
(0.329)
0.647**
LTV 75 < LTV <= 80
(0.310)
0.881**
LTV 80 < LTV <= 85
(0.384)
1.212**
LTV 85 < LTV <= 90
(0.433)
1.833***
LTV 90 < LTV <= 95
(0.339)
1.983**
LTV 95 < LTV <= 100
(0.486)
-0.124
I Subprime * LTV LTV <= 65
(0.466)
0.531
I Subprime * LTV 65 < LTV <= 70
(0.499)
0.462
I Subprime * LTV 70 < LTV <= 75
(0.663)
0.529
I Subprime * LTV 75 < LTV <= 80
(0.355)
-0.032
I Subprime * LTV 80 < LTV <= 85
(0.594)
0.601**
I Subprime * LTV 85 < LTV <= 90
(0.305)
0.631*
I Subprime * LTV 90 < LTV <= 95
(0.343)
0.768**
I Subprime * LTV 95 < LTV <= 100
(0.364)
45.03***
I Stated Income
(8.303)
0.903***
DTI
(0.443)
0.496
I Stated Income * DTI
(0.849)
-0.942**
I Subprime * I Stated Income
(0.409)
-0.669
I Subprime * DTI
(0.771)
-0.569**
I Subprime * I Stated Income * DTI
(0.276)
-38.53
I Investment Bank
(20.51)
-45.96
I Implosion
(27.56)
15.39
I February 2007
(13.72)
67.91***
I June 2007
(23.94)
102.4***
I December 2007
(40.67)
143.4***
I May 2008
(48.01)
-1.355
HPA State 2004 – 2006
(1.485)
-2.844
HPA State 2007
(3.298)

122.1
F statistic, H0: I Month = 0
(0.000)
2.311
F statistic, H0: HPA = 0
(0.332)
83.12
F statistic, H0: I State = 0
(0.000)
Observations 8123
Adjusted R2 0.865
Figure 1 – One explanation of the subprime mortgage crisis
 West Area Rate Sheet - 2 Year Fixed - 2 Year Prepay / Par (CA, HI, WA, OR, NV, ID, MT, WY, UT, CO, AZ, AK)
Pricing Adjustments
Full Doc Stated Income
GRADE SCORE Loan Size Rate Adj
12-Mo Mtg. LTV 65% 70% 75% 80% 85% 90% 95%* 100%* 65% 70% 75% 80% 85% 90% 95%* 100% * $750,000 + 0.250
700+ 6.100 6.150 6.250 6.350 6.500 6.850 7.650 8.050 6.550 6.600 6.700 6.800 6.950 7.400 8.050 8.450 $200,000 - $749,999 --
AA+ 680 6.150 6.200 6.300 6.400 6.650 7.000 7.800 8.200 6.600 6.650 6.750 6.850 7.100 7.550 8.300 8.700 $175,000 - $199,999 0.250
0X30 660 6.200 6.250 6.350 6.450 6.700 7.050 7.900 8.450 6.650 6.700 6.800 7.000 7.350 7.700 8.400 8.950 $150,000 - $174,999 0.500
dotted box = I/O min 640 6.250 6.300 6.400 6.500 6.900 7.300 7.950 8.800 6.700 6.750 6.950 7.150 7.400 7.800 8.450 9.300 $125,000 - $149,999 0.750
Margin = 6.00 620 6.350 6.400 6.500 6.600 7.000 7.400 8.100 9.100 6.800 6.950 7.050 7.250 7.600 8.000 8.750 0.000 $100,000 - $124,999 1.250
600 6.450 6.500 6.600 6.900 7.150 7.600 8.350 ^ 9.550 6.900 7.050 7.150 7.400 7.750 8.300 0.000 0.000 $75,000 - $99,999 2.000
Stated Wage Earner: 580 6.550 6.600 6.900 7.050 7.350 7.850 8.850 0.000 7.100 7.150 7.300 7.650 0.000 0.000 0.000 0.000 $50,000 - $74,999 3.000
Max 80% min 500 score 560 6.750 6.900 7.100 7.350 7.700 8.250 0.000 0.000 7.400 7.550 7.600 8.050 0.000 0.000 0.000 0.000 <$50,000 (Applies to 2nd TD only) 2.000
Max 85% min 600 score 540 7.100 7.350 7.550 7.800 8.250 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Products Rate Adj
Max 90% min 620 score 520 7.800 8.050 8.250 8.500 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Fixed (Jumbo Loans) 0.750
Max 95% min 680 score 500 8.700 8.950 9.150 9.400 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Fixed (Fannie Mae Conforming Limits) 0.500
700+ 6.350 6.400 6.500 6.600 6.750 7.100 7.750 8.150 6.750 6.800 6.900 7.000 7.150 7.500 8.150 8.540 3-year ARM 0.250
AA 680 6.400 6.450 6.550 6.650 7.000 7.250 7.900 8.300 6.800 6.850 6.950 7.050 7.300 7.650 8.400 8.700 5-year ARM 0.350
1X30 660 6.450 6.500 6.600 6.700 6.950 7.300 8.050 8.550 6.850 6.900 7.000 7.100 7.450 7.800 8.505 8.855 40-Year or 50-Year (Term Extension - min 540) 0.100
dotted box = I/O min 640 6.500 6.550 6.650 6.750 7.000 7.400 8.050 8.900 6.900 6.950 7.150 7.250 7.500 7.900 8.550 9.400 40-Year (Term Extension 500 - 539, where applicable) 0.300
Margin = 6.20 620 6.600 6.650 6.750 6.850 7.100 7.500 8.200 9.200 7.000 7.150 7.250 7.350 7.700 8.100 0.000 0.000 Interest-Only >= 620 (AA+, AA only) 0.250
600 6.700 6.750 6.850 7.000 7.250 7.700 8.450 ^ 9.720 7.200 7.350 7.450 7.600 7.950 8.400 0.000 0.000 Interest-Only < 620 (AA+, AA only) 0.400
Stated Wage Earner: 580 6.800 6.850 7.000 7.150 7.450 7.950 8.950 0.000 7.300 7.350 7.600 7.850 0.000 0.000 0.000 0.000 Documentation Rate Adj
Max 80% min 500 score 560 7.000 7.150 7.200 7.450 7.800 8.350 0.000 0.000 7.600 7.750 7.800 8.150 0.000 0.000 0.000 0.000 Business Bank Statements (add-on to Full Doc) 0.250
Max 85% min 600 score 540 7.350 7.600 7.650 7.900 8.350 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 No-Doc (Add-on to Stated Rate, AA+ only) 0.600
Max 90% min 620 score 520 8.050 8.300 8.350 8.600 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Score Advantage: Qualify with Co-Borrower Score 0.500
Max 95% min 680 score 500 8.950 9.200 9.250 9.500 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Stated Wage Earner (add to Stated: CA & HI @ .10) 0.250
700+ 6.450 6.500 6.600 6.700 6.850 7.200 7.850 8.250 6.850 6.900 7.000 7.100 7.250 7.700 0.000 0.000 Other Adjustments Rate Adj
A 680 6.500 6.550 6.650 6.750 7.100 7.350 8.000 8.400 6.900 6.950 7.050 7.150 7.400 7.850 0.000 0.000 Purchase (0.100)
2X30 660 6.550 6.600 6.700 6.800 7.050 7.400 8.150 8.650 6.950 7.000 7.100 7.200 7.550 7.900 0.000 0.000 Disposable Income >= $2,500 (Full Doc Only) (0.100)
640 6.600 6.650 6.750 6.850 7.100 7.500 8.150 9.000 7.050 7.100 7.200 7.300 7.650 8.050 0.000 0.000 Cash Reserves >= 6 Months Principal & Interest (0.100)
Margin = 6.40 620 6.700 6.750 6.850 6.950 7.200 7.600 8.300 9.295 7.200 7.250 7.350 7.550 7.800 8.200 0.000 0.000 First Time Home Buyer (FTHB) 0.250
600 6.800 6.850 6.950 7.100 7.350 7.800 8.550 ^ 9.750 7.400 7.550 7.550 7.700 8.050 8.500 0.000 0.000 80/15 BackPack - 2nd Mortgage Rate (14.05 @ 580) (0.250)
Stated Wage Earner: 580 6.900 6.950 7.100 7.250 7.550 8.050 0.000 0.000 7.600 7.650 7.800 7.950 0.000 0.000 0.000 0.000 Manual Submission (Paper Submission) 0.400
Max 80% min 500 score 560 7.100 7.250 7.300 7.550 7.900 8.450 0.000 0.000 7.800 7.950 7.950 8.300 0.000 0.000 0.000 0.000 12 Months Verification of Rent (FTHB only) (0.100)
Max 85% min 600 score 540 7.450 7.700 7.750 8.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Buyups/Buydowns Points Rate Adj
Max 90% min 620 score 520 8.150 8.400 8.450 8.700 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2-year Fixed 1.000 = 0.600
500 9.150 9.400 9.450 9.700 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 3-Year Fixed 1.000 = 0.550
700+ 6.850 6.950 7.100 7.250 7.400 7.750 8.400 8.850 7.250 7.350 7.500 7.650 7.800 8.250 0.000 0.000 5-Year Fixed 1.000 = 0.550
B 680 7.000 7.100 7.250 7.400 7.900 8.200 8.900 9.300 7.350 7.450 7.600 7.750 8.150 8.650 0.000 0.000 Fixed 1.000 = 0.550
4X30 660 7.050 7.150 7.350 7.450 8.050 8.500 9.350 9.900 7.550 7.650 7.900 8.000 8.700 9.150 0.000 0.000 Prepay Charge/Buyout (2/28 = 2yrs, 3/27, 5/25 & fixed = 3yrs) Points Rate Adj
or 640 7.150 7.250 7.450 7.500 8.250 8.750 9.600 10.200 7.650 7.750 7.950 8.000 8.850 9.350 0.000 0.000 Partial Prepay State 0.200
2X30,1X60 620 7.300 7.450 7.650 7.700 8.650 9.150 10.100 10.725 7.800 7.950 8.150 8.250 9.250 9.750 0.000 0.000 Non-Pre Pay State 0.400
600 7.450 7.550 7.700 7.750 8.850 9.400 10.450 ^ 11.400 8.050 8.250 8.200 8.350 9.550 0.000 0.000 0.000 1-year prepay (max 1 YSP) 1.250 or 0.750
Margin = 6.65 580 7.600 7.650 7.900 8.000 9.200 9.750 0.000 0.000 8.300 8.350 8.600 8.700 0.000 0.000 0.000 0.000 2-year prepay (3/27,5/25 or Fixed) 1.000 or 0.500
560 7.850 7.950 8.100 8.350 0.000 0.000 0.000 0.000 8.600 8.650 8.750 9.100 0.000 0.000 0.000 0.000 Partial Prepay Buyout (no YSP) 1.250 or 0.800
540 8.200 8.350 8.600 8.850 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Prepay Buyout (no YSP) 1.500 or 1.000
520 8.900 9.050 9.350 9.600 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Property Type Rate Adj
500 9.800 9.950 10.250 10.500 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2-4 units 0.400
700+ 7.200 7.300 7.450 7.600 7.750 8.150 9.050 0.000 7.600 7.700 7.850 8.000 8.150 8.650 0.000 0.000 Occupancy <=70% 70.01 - 80.00% >80%
C 680 7.300 7.400 7.550 7.700 8.200 8.600 9.500 0.000 7.700 7.800 7.950 8.100 8.500 9.100 0.000 0.000 2nd Home (Standalone only) 0.125 0.250 0.375
6X30,1X60,1X90 660 7.400 7.500 7.700 7.850 8.400 9.000 9.875 0.000 7.750 7.850 7.900 8.050 8.700 9.300 0.000 0.000 Non-Owner Occupancy (Minimum FICO 560) 0.500 0.750 1.000
or 640 7.500 7.600 7.800 7.850 8.600 9.300 10.000 0.000 7.900 8.100 8.300 8.350 9.200 9.900 0.000 0.000 Secondary Financing (CLTV > LTV) (MN add 0.65, TN add 0.90)
6X30,2X60,0x90 620 7.650 7.800 8.000 8.050 9.000 9.750 10.500 0.000 8.050 8.150 8.350 8.500 9.450 10.200 0.000 0.000 Credit Score >= 660 0.900
600 7.800 7.900 8.050 8.150 9.200 10.050 10.850 0.000 8.400 8.600 8.650 8.750 9.900 0.000 0.000 0.000 Credit Score < 660 1.550
Margin = 7.25 580 8.050 8.100 8.350 8.500 9.650 0.000 0.000 0.000 8.800 8.850 9.100 9.250 0.000 0.000 0.000 0.000 UW Fees (Combos add $100/loan) UW Fee UW Buyout
560 8.200 8.250 8.450 8.750 0.000 0.000 0.000 0.000 8.950 9.000 9.100 9.500 0.000 0.000 0.000 0.000 $300,000 + $850 or 0.200
540 8.550 8.700 8.950 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 $125,000 - $299,000 $850 or 0.300
520 9.250 9.400 9.700 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 <$125,000 $695 or 0.500
500 10.150 10.300 10.600 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 LTV Max Eligibility Adjustments AA+ AA A B C CC
700+ 9.250 0.000 0.000 0.000 0.000 0.000 0.000 0.000 9.800 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Non-Owner, Full Doc -5 -10 -10 -10 -10 -10
CC 680 9.250 0.000 0.000 0.000 0.000 0.000 0.000 0.000 9.800 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Non-Owner, Stated (Max 90%, no CC) -5 -10 -10 -10 -10 -10
MTG = OTHER 660 9.350 0.000 0.000 0.000 0.000 0.000 0.000 0.000 10.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 3-4 Units, Full Doc (Max 90%) -5 -5 -5 -5 -5 -5
640 9.450 0.000 0.000 0.000 0.000 0.000 0.000 0.000 10.100 0.000 0.000 0.000 0.000 0.000 0.000 0.000 3-4 Units, Stated (Max 90%) -5 -5 -5 -5 -5 -5
Margin = 7.40 620 9.550 0.000 0.000 0.000 0.000 0.000 0.000 0.000 10.450 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Second Home > 80% *, Full Doc -5 -5 -5 -5 -5 -10
600 9.750 0.000 0.000 0.000 0.000 0.000 0.000 0.000 10.700 0.000 0.000 0.000 0.000 0.000 0.000 0.000 Second Home > 80%, Stated (Max 90%, no CC) -5 -5 -5 -5 -5 -5
580 9.850 0.000 0.000 0.000 0.000 0.000 0.000 0.000 11.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 No Doc Maximum LTVs: 660 - 85%, 680 - 90%, 700 - 95%
560 10.300 0.000 0.000 0.000 0.000 0.000 0.000 0.000 11.400 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SWE 95% or Combor (CA only) Refinance or Purchase - 640+ / FTHB - 680+
540 11.250 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
Stated Wage Earner Max 80% for 560-599, 85% for 600-619, 90% for 620-679, 95% for 680+ (SWE not available > 95%)
520 12.850 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000
500 13.550 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

* 80/15 available and applicable (FICO >= 600) Minimum Rates

*** Secondary Financing Included 2/28 and 3/27 @ 5.60, 5/25 @ 5.99, Fixed (15,20,30) @ 6.40
If you do not wish to receive further documents call 866.803.3697 to be removed from our database.
“For business entities only and not for advertising purposes”
Option One Mortgage Corporation, 3 Ada, Irvine, CA 92618, is an Arizona Mortgage Banker #BK15204; Loans made or arranged pursuant to a Department of Corporations California
Finance Lenders License; Option One Mortgage Corporation is a Georgia Residential 3/7/2007
Figure 3 – Selected borrower variables over time
Note: Panels graph the linearly interpolated monthly averages of the respective borrower variables over time at the borrower level.
The top and bottom dashed lines correspond to the 95th and 5th percentile of the variable within a given month, respectively.

Figure 4 – Selected offer variables over time

Note: Panels graph the linearly interpolated monthly averages of the respective offer variables over time at the offer-level. The top
and bottom dashed lines correspond to the 95th and 5th percentile of the variable within a given month, respectively.
Figure 5 – Cumulative lender implosions over time

Note: The relative size of an observation is the percentage of offers in the LS data that comes from the lender. Lenders in bold are the 10 largest lenders in the LS data.
Figure 6 – Offers per borrower over time

Figure 7 – The effect of loan-to-value on credit spread

Note: Graph corresponds to regression (2) on Table 8. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for LTV LTV <=
65 through LTV 95 < LTV <=100 and V is the subsection of the variance-covariance matrix of their regression coefficients. All other
variables not graphed but included in the regression are set to their respective sample means.
Figure 8 – The effect of credit score on credit spread
Note: Graph corresponds to regression (2) on Table 8. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for I Credit Score
<= 519 through I 679 < Credit Score <= 699 and V is the subsection of the variance-covariance matrix of their regression coefficients. All other
variables not graphed but included in the regression are set to their respective sample means.

Subprime Prime

Figure 9 – The effect of loan size on credit spread

Note: Graph corresponds to regression (2) on Table 8. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for I 50 < Loan
Amount <= 75 through I Loan Amount < 417 and V is the subsection of the variance-covariance matrix of their regression coefficients. All other
variables not graphed but included in the regression are set to their respective sample means.
Figure 10 – The effect of loan-to-value on credit spread by borrower type
Note: Graph corresponds to regression (3) on Table 8. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for LTV LTV <=
65 through I Subprime * LTV 95 < LTV <=100 and V is the subsection of the variance-covariance matrix of their regression coefficients. All
other variables not graphed but included in the regression are set to their respective sample means, except Credit Score which is set
to 620.

Figure 11 – The effect of loan size on credit spread by borrower type

Note: Graph corresponds to regression (4) on Table 8. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for I 50 < Loan
Amount <= 75 through I Subprime * I Loan Amount < 417 and V is the subsection of the variance-covariance matrix of their regression coefficients.
All other variables not graphed but included in the regression are set to their respective sample means, except Credit Score which is
set to 620.
Figure 12 – The effects of loan-to-value, credit score and loan amount on credit spread by lender ownership

Note: The panels correspond to regressions (2) – (4) on Table 9, respectively. Each panel shares the same vertical axis. All other variables not graphed but included in the regressions are set to their
respective sample means.

Subprime Prime
Figure 13 – The effects of loan-to-value, credit score and loan amount on credit spread by lender survival

Note: The panels correspond to regressions (5) – (7) on Table 9, respectively. Each panel shares the same vertical axis. All other variables not graphed but included in the regressions are set to their
respective sample means.

Subprime Prime
Figure 14 – Estimated percentage of offers accepted by lender ownership and survival
Note: The decision rule used to determine if a borrower accepts an offer is if it has the lowest Spread. Because the percentage of
lenders that implode in the LS data declines rapidly over time by construction, this table only considers the 137,890 offers in the LS
data from January 2007 to March 2007 when the portion of imploded lenders was relatively constant.

100%

90%

80%

70%
% Accepted (Investment Bank)

60% % Investment Bank in LS data

% Accepted (Implosion)
50%
% Implosion in LS data

40%

30%

20%

10%

0%
500-550 550-600 600-650 650-700 700-750 750-800 800-850
Credit Score range
Figure 15 – Credit spread trends over time

Note: The blue curve represents the linearly interpolated values of the I Month coefficients from regression (1) on Table 10. Timeline events come from Wikipedia’s “Subprime Crisis Impact Timeline” entry,
the Joint Economic Committee’s “Subprime Mortgage Market Timeline” and The New York Times’s “March to a Meltdown Timeline.” Implosions of the 10 largest lenders in the LS data are noted in bold
red text at the bottom of the graph by month of implosion (the only lender of the 10 that did not implode was JPMorgan’s Chase).

300 bps

Monthly premium January 24, 2008 - National

250 bps
200 bps
January 1, 2007 - Case-
Shiller home price index
tracks first year-over-year
fall at the beginning of Q1
2007
January 3, 2007 -
150 bps Ownit Mortgage is the
nation's first subprime
lender to declare
bankruptcy
March 12, 2007 - New
100 bps Century, the nation's
largest subprime lender,
stops accepting subprime
loan applications and
DJIA falls 500 points
September 18, 2007 - RealtyTrac Association of Realtors announces the
announces that foreclosure filings largest nationwide drop in home sales
surged to 243,000 (or 1 in every 540 in 25 years blaming "tight mortgage
homes) in August 2007 markets"
August 16, 2007 - Countrywide,
the nation's largest operating
subprime lender, takes an $11
billion loan from a group of banks
to avoid bankruptcy
July 19, 2007 - DJIA November 1, 2007 - Federal
closes above 14,000 with
Reserve allows banks to borrow $41
what the Wall Street March 16, 2008 - Bear Stearns is
billion in new capital, the largest acquired for $2 / share by JPMorgan in
Jounral calls "defiant injection since 8 days after
optimism" a deal backed by the Federal Reserve
September 11, 2001
August 10, 2007 - Central banks
coordinate efforts to inject $200
billion into the financial system
August 31, 2007 - Ameriquest, the
nation's second largest subprime
lender, stops accepting loan
applications
April 2, 2007 - New
Century declares

Resmae Mortgage
Argent Mortgage

bankruptcy
BNC Mortgage

50 bps
Decision One

Countrywide
Long Beach

Option One
Mortgage

Mortgage

Mortgage
Crevecor

Saxon
0 bps
Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08
Figure 16 – Decomposition of mortgage interest rates over time

Note: The values for the monthly premiums are the I Month coefficients from regression (1) on Table 10. The value for the borrower and mortgage characteristics is the prediction of Spread using regression
(1) with all variables except the I Month variables set to their respective monthly sample means.

1200 bps
Rate decomposition
Monthly premium
10-year Treasury rate
Borrower and mortgage characteristics
1000 bps

800 bps

600 bps

400 bps

200 bps

0 bps
Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08
Figure 17 – The effect of credit score on credit spread before and after July 2007
Note: Graph corresponds to regression (5) on Table 10. Confidence bands are calculated post-estimation by the Delta Method
approximation, which states that the error of the estimates is asymptotically ~N(0, XVXT), where X is a vector of values for I Credit Score
<= 519 through I Post-July 2007 * I 679 < Credit Score <= 699 and V is the subsection of the variance-covariance matrix of their regression
coefficients. All other variables not graphed but included in the regression are set to their respective sample means.

Subprime Prime

Figure 18 – Estimated percentage of offers accepted by lender ownership and survival

Note: The decision rule used to determine if a borrower accepts an offer is if it has the highest Max LTV. Because the percentage of
lenders that implode in the LS data declines rapidly over time by construction, this table only considers the 137,890 offers in the LS
data from January 2007 to March 2007 when the portion of imploded lenders was relatively constant.

100%

90%

80%

70%

60%
% Accepted (Implosion)
50% % Implosion in LS data
% Accepted (Investment Bank)
40%
% Investment Bank in LS data

30%

20%

10%

0%
500-550 550-600 600-650 650-700 700-750 750-800 800-850
Credit Score range
Figure 19 – Maximum leverage limits over time

Note: The blue section represents the predictions of regression (1) on Table 11 with all variables besides the I Month variables set to their respective sample averages.

100%
0%

98%
2%

96%
4%

94%
6%

92% 8%

90% 10%

88% 12%

86% 14%

84% 16%
Jan-07 Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08
Max LTV Min Down