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Predatory Lending and the Subprime Crisis

Author

Listed:
  • Agarwal, Sumit

    (National University of Singapore and Federal Reserve Bank of Chicago)

  • Ben-David, Itzhak

    (OH State University)

  • Amromin, Gene

    (Federal Reserve Bank of Chicago)

  • Chomsisengphet, Souphala

    (US Office of the Comptroller of the Currency)

  • Evanoff, Douglas D.

    (Federal Reserve Bank of Chicago)

Abstract

It 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.

Suggested Citation

  • Agarwal, Sumit & Ben-David, Itzhak & Amromin, Gene & Chomsisengphet, Souphala & Evanoff, Douglas D., 2012. "Predatory Lending and the Subprime Crisis," Working Paper Series 2012-08, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  • Handle: RePEc:ecl:ohidic:2012-08
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    References listed on IDEAS

    as
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    Cited by:

    1. Robert Argento & Lariece Brown & Sergei Koulayev & Grace Li & Marina Myhre & Forrest W. Pafenberg & Saty Patrabansh, 2018. "First-Time Homebuyer Counseling and the Mortgage Selection Experience in the United States: Evidence from the National Survey of Mortgage Originations," NMDB Staff Working Papers 18-02, Federal Housing Finance Agency.
    2. Steinbuks, Jevgenijs, 2015. "Effects of prepayment regulations on termination of subprime mortgages," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 445-456.
    3. repec:eee:juecon:v:99:y:2017:i:c:p:62-78 is not listed on IDEAS
    4. Luigi Zingales, 2015. "Does Finance Benefit Society?," NBER Working Papers 20894, National Bureau of Economic Research, Inc.
    5. Gabriel, Stuart A. & Kahn, Matthew E. & Vaughn, Ryan K., 2015. "Congressional influence as a determinant of subprime lending," Journal of Housing Economics, Elsevier, vol. 28(C), pages 91-102.
    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. Patrick Bayer & Fernando Ferreira & Stephen L. Ross, 2014. "Race, Ethnicity and High-Cost Mortgage Lending," NBER Working Papers 20762, National Bureau of Economic Research, Inc.
    8. 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 19920, National Bureau of Economic Research, Inc.
    9. DiMaggio, Marco & Haughwout, Andrew F. & Kermani, Amir & Mazewski, Matthew & Pinkovskiy, Maxim L., 2016. "Health spending slowed down in spite of the crisis," Staff Reports 781, Federal Reserve Bank of New York.
    10. 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.
    11. An, Xudong & Cordell, Lawrence R., 2017. "Regime Shift And The Post-Crisis World Of Mortgage Loss Severities," Working Papers 17-8, Federal Reserve Bank of Philadelphia.
    12. 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.
    13. Morrison, Alan & Thanassoulis, John, 2017. "Ethical standards and cultural assimilation in financial services," CEPR Discussion Papers 12060, C.E.P.R. Discussion Papers.

    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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