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The prevalence and impact of misstated incomes on mortgage loan applications

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  • Blackburn, McKinley L.
  • Vermilyea, Todd
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    Abstract

    Misstatement of income on mortgage loan applications (the “liar-loan” problem) is thought to have been a contributor to the boom and bust of mortgage markets. We provide nationwide measurements that reflect the degree to which incomes on mid-2000 home-purchase mortgage loan applications were overstated relative to the actual incomes of mortgage applicants. Our results suggest a substantial degree of income overstatement in 2005 and 2006, one consistent with the average mortgage application overstating income 15–20%. We find the tendency to misstate income was associated with markets with large home-price increases during the boom. There is little support for the proposition that income overstatement played a substantial role in subsequent mortgage defaults.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Housing Economics.

    Volume (Year): 21 (2012)
    Issue (Month): 2 ()
    Pages: 151-168

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    Handle: RePEc:eee:jhouse:v:21:y:2012:i:2:p:151-168

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    Web page: http://www.elsevier.com/locate/inca/622881

    Related research

    Keywords: Mortgage lending; Liar loans; Housing crisis;

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    1. Kristopher S. Gerardi & Andreas Lehnert & Shane M. Sherlund & Paul S. Willen, 2009. "Making sense of the subprime crisis," Working Paper 2009-02, Federal Reserve Bank of Atlanta.
    2. Adam B. Ashcraft & Til Schuermann, 2008. "Understanding the securitization of subprime mortgage credit," Staff Reports 318, Federal Reserve Bank of New York.
    3. Jeffrey M. Wooldridge, 2001. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262232197, December.
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    6. Haughwout, Andrew & Peach, Richard & Tracy, Joseph, 2008. "Juvenile delinquent mortgages: Bad credit or bad economy?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 246-257, September.
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    8. Joshua D. Angrist, 1998. "Estimating the Labor Market Impact of Voluntary Military Service Using Social Security Data on Military Applicants," Econometrica, Econometric Society, vol. 66(2), pages 249-288, March.
    9. Foote, Christopher L. & Gerardi, Kristopher & Goette, Lorenz & Willen, Paul S., 2008. "Just the facts: An initial analysis of subprime's role in the housing crisis," Journal of Housing Economics, Elsevier, vol. 17(4), pages 291-305, December.
    10. Green, Richard K., 2008. "Imperfect information and the housing finance crisis: A descriptive overview," Journal of Housing Economics, Elsevier, vol. 17(4), pages 262-271, December.
    11. Francisca Richter, 2008. "An analysis of foreclosure rate differentials in soft markets," Working Paper 0811, Federal Reserve Bank of Cleveland.
    12. Sanders, Anthony, 2008. "The subprime crisis and its role in the financial crisis," Journal of Housing Economics, Elsevier, vol. 17(4), pages 254-261, December.
    13. Mark Doms & Fred Furlong & John Krainer, 2007. "Subprime mortgage delinquency rates," Working Paper Series 2007-33, Federal Reserve Bank of San Francisco.
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