Fisher Center for Real Estate and Urban Economics

Lowering of underwriting standards may have contributed much to the unprecedented recent rise and subsequent fall of mortgage volumes and house prices. Conventional data don’t satisfactorily measure aggregate underwriting standards over the past decade: The easing and then tightening of underwriting, inside and especially outside of banks, was likely much more extensive than they indicate. Given mortgage market developments since the mid 1990s, the method of principal components produces a superior indicator of mortgage underwriting standards. We show that the resulting indicator better fits the variation over time in the laxity and tightness of underwriting. Based on a VAR, we then show how conditions affected underwriting standards. The results also show that our new indicator of underwriting helps account for the behavior of mortgage volumes, house prices, and GDP during the recent boom in mortgage and housing markets.