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Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency

Author

Listed:
  • Wei Jiang

    (Columbia Business School)

  • Ashlyn Aiko Nelson

    (Indiana University)

  • Edward Vytlacil

    (New York University)

Abstract

This paper presents an analysis of mortgage delinquency between 2004 and 2008 using a loan-level data set from a major national mortgage bank. Our analysis highlights two problems underlying the mortgage crisis: a reliance on mortgage brokers who tend to originate lower-quality loans and a prevalence of low-documentation loans—known in the industry as “liar's loans”—that result in borrower information falsification. While over three-quarters of the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics, the delinquency difference between full- and low-documentation mortgages is due to unobservable heterogeneity, about half of it potentially due to income falsification. © 2014 The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Suggested Citation

  • 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, vol. 96(1), pages 1-18, March.
  • Handle: RePEc:tpr:restat:v:96:y:2014:i:1:p:1-18
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    Cited by:

    1. Rajkamal Iyer & Asim Ijaz Khwaja & Erzo F. P. Luttmer & Kelly Shue, 2016. "Screening Peers Softly: Inferring the Quality of Small Borrowers," Management Science, INFORMS, vol. 62(6), pages 1554-1577, June.
    2. Sumit Agarwal & Gene Amromin & Itzhak Ben-David & Douglas D. Evanoff, 2016. "Loan Product Steering in Mortgage Markets," NBER Working Papers 22696, National Bureau of Economic Research, Inc.
    3. repec:kap:jrefec:v:59:y:2019:i:1:d:10.1007_s11146-018-9671-2 is not listed on IDEAS
    4. 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.
    5. Marsha J. Courchane & Stephen L. Ross, 2018. "Evidence and Actions on Mortgage Market Disparities: Research, Fair Lending Enforcement and Consumer Protection," Working Papers 2018-052, Human Capital and Economic Opportunity Working Group.
    6. Sumit Agarwal & Itzhak Ben-David & Vincent Yao, 2015. "Collateral Valuation and Borrower Financial Constraints: Evidence from the Residential Real Estate Market," Management Science, INFORMS, vol. 61(9), pages 2220-2240, September.
    7. Kelly, Robert & O'Malley, Terry & O'Toole, Conor, 2014. "Do first time buyers default less? Implications for macro-prudential policy," Economic Letters 14/EL/14, Central Bank of Ireland.
    8. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: Further Evidence," NBER Working Papers 21320, National Bureau of Economic Research, Inc.
    9. repec:eee:jmacro:v:56:y:2018:i:c:p:243-257 is not listed on IDEAS
    10. repec:eee:juecon:v:99:y:2017:i:c:p:79-93 is not listed on IDEAS
    11. repec:eee:jfinin:v:35:y:2018:i:pa:p:70-85 is not listed on IDEAS
    12. Adelino, Manuel & Scott Frame, W. & Gerardi, Kristopher, 2017. "The effect of large investors on asset quality: Evidence from subprime mortgage securities," Journal of Monetary Economics, Elsevier, vol. 87(C), pages 34-51.
    13. W. Scott Frame & Larry Wall & Lawrence J. White, 2018. "Technological Change and Financial Innovation in Banking: Some Implications for FinTech," Working Papers 18-28, New York University, Leonard N. Stern School of Business, Department of Economics.
    14. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class," NBER Working Papers 20848, National Bureau of Economic Research, Inc.
    15. Feiler, Lauren, 2014. "Testing models of information avoidance with binary choice dictator games," Journal of Economic Psychology, Elsevier, vol. 45(C), pages 253-267.
    16. repec:eee:finsta:v:36:y:2018:i:c:p:322-335 is not listed on IDEAS
    17. repec:eee:finsta:v:33:y:2017:i:c:p:1-22 is not listed on IDEAS
    18. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.
    19. Eid, Nourhan & Maltby, Josephine & Talavera, Oleksandr, 2016. "Income Rounding and Loan Performance in the Peer-to-Peer Market," MPRA Paper 72852, University Library of Munich, Germany.
    20. repec:eee:worbus:v:53:y:2018:i:4:p:504-513 is not listed on IDEAS
    21. Oleksandr Talavera & Haofeng Xu, 2018. "Role of Verification in Peer-to-Peer Lending," Working Papers 2018-25, Swansea University, School of Management.
    22. Andra C. Ghent & Rubén Hernández-Murillo & Michael T. Owyang, 2015. "Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 43(4), pages 820-854, November.
    23. repec:eee:quaeco:v:64:y:2017:i:c:p:171-182 is not listed on IDEAS
    24. Gaudêncio, João & Mazany, Agnieszka & Schwarz, Claudia, 2019. "The impact of lending standards on default rates of residential real estate loans," Occasional Paper Series 220, European Central Bank.
    25. repec:eee:jfinec:v:132:y:2019:i:1:p:1-25 is not listed on IDEAS

    More about this item

    Keywords

    mortgage delinquency; loans; mortgage banks;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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