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Predatory Lending and the Subprime Crisis

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  • Sumit Agarwal
  • Gene Amromin
  • Itzhak Ben-David
  • Souphala Chomsisengphet
  • Douglas D. Evanoff

Abstract

We measure the effect of an anti-predatory pilot program (Chicago, 2006) on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers and/or risky mortgage contracts triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot cut market activity in half, largely through the exit of lenders specializing in risky loans and through decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19550.

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Date of creation: Oct 2013
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Publication status: published as Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2014. "Predatory lending and the subprime crisis," Journal of Financial Economics, Elsevier, vol. 113(1), pages 29-52.
Handle: RePEc:nbr:nberwo:19550

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References

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  1. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2010. "The Determinants of Attitudes towards Strategic Default on Mortgages," Economics Working Papers, European University Institute ECO2010/31, European University Institute.
  2. Marianne Bertrand & Adair Morse, 2011. "Information Disclosure, Cognitive Biases, and Payday Borrowing," Journal of Finance, American Finance Association, American Finance Association, vol. 66(6), pages 1865-1893, December.
  3. Brian T. Melzer, 2011. "The Real Costs of Credit Access: Evidence from the Payday Lending Market," The Quarterly Journal of Economics, Oxford University Press, Oxford University Press, vol. 126(1), pages 517-555.
  4. Alberto Abadie & Javier Gardeazabal, 2003. "The Economic Costs of Conflict: A Case Study of the Basque Country," American Economic Review, American Economic Association, American Economic Association, vol. 93(1), pages 113-132, March.
  5. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2004. "How Much Should We Trust Differences-in-Differences Estimates?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 119(1), pages 249-275, February.
  6. John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management And Optimal Mortgage Choice," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1449-1494, November.
  7. repec:reg:rpubli:396 is not listed on IDEAS
  8. Sumit Agarwal & Paige M. Skiba & Jeremy Tobacman, 2009. "Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?," NBER Working Papers, National Bureau of Economic Research, Inc 14659, National Bureau of Economic Research, Inc.
  9. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 125(1), pages 307-362, February.
  10. Raphael Bostic & Souphala Chomsisengphet & Kathleen Engel & Patricia McCoy & Anthony Pennington-Cross & Susan Wachter, 2012. "Mortgage Product Substitution and State Anti-predatory Lending Laws: Better Loans and Better Borrowers?," Atlantic Economic Journal, International Atlantic Economic Society, International Atlantic Economic Society, vol. 40(3), pages 273-294, September.
  11. John Y. Campbell & Stefano Giglio & Parag Pathak, 2009. "Forced Sales and House Prices," NBER Working Papers, National Bureau of Economic Research, Inc 14866, National Bureau of Economic Research, Inc.
  12. Morse, Adair, 2011. "Payday lenders: Heroes or villains?," Journal of Financial Economics, Elsevier, Elsevier, vol. 102(1), pages 28-44, October.
  13. Carlin, Bruce I., 2009. "Strategic price complexity in retail financial markets," Journal of Financial Economics, Elsevier, Elsevier, vol. 91(3), pages 278-287, March.
  14. Bolton, Patrick & Freixas, Xavier & Shapiro, Joel, 2007. "Conflicts of interest, information provision, and competition in the financial services industry," Journal of Financial Economics, Elsevier, Elsevier, vol. 85(2), pages 297-330, August.
  15. Wei Jiang & Ashlyn Aiko Nelson & Edward Vytlacil, 2014. "Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency," The Review of Economics and Statistics, MIT Press, MIT Press, vol. 96(1), pages 1-18, March.
  16. repec:reg:wpaper:396 is not listed on IDEAS
  17. Itzhak Ben-David, 2011. "Financial Constraints and Inflated Home Prices during the Real Estate Boom," American Economic Journal: Applied Economics, American Economic Association, American Economic Association, vol. 3(3), pages 55-87, July.
  18. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas D. Evanoff, 2010. "Learning to Cope: Voluntary Financial Education and Loan Performance during a Housing Crisis," American Economic Review, American Economic Association, American Economic Association, vol. 100(2), pages 495-500, May.
  19. Bond, Philip & Musto, David K. & Yilmaz, Bilge, 2009. "Predatory mortgage lending," Journal of Financial Economics, Elsevier, Elsevier, vol. 94(3), pages 412-427, December.
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Citations

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Cited by:
  1. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2013. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," NBER Working Papers, National Bureau of Economic Research, Inc 19606, National Bureau of Economic Research, Inc.
  2. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Souphala Chomsisengphet & Douglas Evanoff, 2014. "The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?," NBER Working Papers, National Bureau of Economic Research, Inc 19920, National Bureau of Economic Research, Inc.

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