Predatory Lending and the Subprime Crisis
AbstractIt is typically argued that predatory lending generated significant social costs and played a central role in creating the subprime crisis. However, there are few estimates of its true effect. We estimate the effect of predatory lending on the residential mortgage default rate using an anti-predatory program implemented in Chicago in 2006. Under the legislation, risky borrowers and risky mortgages triggered mandatory counseling. Following the legislation, market activity decreased by about 35%, where risky borrowers, risky products, and lenders who typically made riskier loans were most affected. Despite the sharp decline in market activity, 18- and 36-month default rates in the treated group exhibited a relative improvement of 12% and 7%, respectively. We estimate that predatory loans have a 6-7% higher default rate than nonpredatory loans. Our results suggest that predatory lending may have not been instrumental in precipitating the financial crisis as often believed.
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Bibliographic InfoPaper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2012-08.
Date of creation: May 2012
Date of revision:
Other versions of this item:
- D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
- D18 - Microeconomics - - Household Behavior - - - Consumer Protection
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-06-13 (All new papers)
- NEP-BAN-2012-06-13 (Banking)
- NEP-SEA-2012-06-13 (South East Asia)
- NEP-URE-2012-06-13 (Urban & Real Estate Economics)
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