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

Jiang, Wei; Nelson, Ashlyn Aiko; Vytlacil, Edward

doi:10.1162/rest_a_00387

Cited by 211 publications

(117 citation statements)

References 8 publications

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“…If lenders were struggling to meet their affordable housing mandates, we would expect to see understatement of borrower incomes so that more loans were eligible for the goals. The evidence Jiang, Nelson and Vytlacil () present also indicates borrowers overstated rather than understated their financial positions.…”

Section: Datamentioning

confidence: 92%

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

Ghent

Hernández-Murillo

Owyang

2015

Real Estate Economics

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We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages. We use merged loan‐level data on nonprime mortgages with individual‐ and neighborhood‐level data for California and Florida. We find no evidence that lenders increased subprime originations or altered loan pricing around the discrete eligibility cutoffs for the Government‐Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act. Although we find evidence that the GSEs bought significant quantities of subprime securities, our results indicate that these purchases were not directly related to affordable housing mandates.

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Section: Datamentioning

confidence: 92%

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

Ghent

Hernández-Murillo

Owyang

2015

Real Estate Economics

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“…Woodward (2008) finds that total charges paid at origination are strongly and negatively related to the percent of residents in a borrower's census tract with a college education. Jiang, Nelson and Vytlacil (2010) find that borrower income and age are both negatively related to the probability that a loan was originated by a broker. Berndt, Hollifield and Sandas (2010) find that broker profits are negatively related to the percent of residents in a borrower's ZIP code with a Bachelor's degree.…”

mentioning

confidence: 87%

“…The literature focusing on the effects of origination channel in subprime lending is small but growing, spurred in no doubt by the recent foreclosure crisis. Laderman and Reid (2009), Jiang, Nelson and Vytlacil (2010), Ding et al . (2011) and Ding et al .…”

Section: Literature Reviewmentioning

confidence: 99%

Origination Channel, Prepayment Penalties and Default

Rose¹

2012

Real Estate Economics

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This article presents evidence that nonbank-originated subprime mortgages have a higher probability of default than bank-originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that nonbanks price prepayment penalties less favorably to borrowers than banks do, and nonbanks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State antipredatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of nonbank originations relative to bank originations. These findings are consistent with incentives generated by nonbank compensation via yield spread premiums on loans with prepayment penalties.Of broad concern for our understanding of the recent foreclosure crisis and for housing and financial stability moving forward is the role of compensation incentives across origination channels in mortgage lending. The specific aspect of this concern addressed in this article is whether and why subprime loans originated by relatively less-supervised nondepository institution mortgage originators ("nonbanks") performed worse than subprime loans originated by depository institutions ("banks") primarily supervised by one of the federal financial regulatory agencies: the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation, Office of Thrift Supervision (OTS) or National Credit Union Association. 1 Results indicate that nonbank originations have a higher probability of default than bank originations, but only for loans that include prepayment penalties. This is the first evidence linking greater default risk across origination channels to a specific loan feature and is consistent with a greater importance of yield spread premiums (YSPs) in compensation among nonbank originators than bank originators. * University of Maryland, Baltimore County, Baltimore, MD 21250 and Office of the Comptroller of the Currency, Washington, DC 20219 or mrose@umbc.edu. 1 Many examinations of mortgage lending by origination channel distinguish between originations by direct lenders ("retail") and by brokers ("wholesale"). Here, nonbank originations include both broker originations and originations by direct lenders that are not depository institutions. As is explained in the data and methodology section, the use of this categorization of origination channel is determined by data availability. C 2012 American Real Estate and Urban Economics Association 2 RoseThe article then presents further evidence that disparities by origination channel in pricing prepayment penalties, borrower financial sophistication and the role of antipredatory lending laws are also consistent with differing compensation incentives.The remainder of this article consists of six sections. The following two sections provide background information and discuss the relevant previous literature. The next sections present the article's hypotheses, describe the article's data so...

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“…Such selection was observable by the lender but would not have been to outside investors. Jiang, Nelson, and Vytlacil () also present evidence suggesting that some borrowers falsified their income when obtaining low‐documentation mortgages.…”

mentioning

confidence: 94%

Agency Conflicts in Residential Mortgage Securitization: What Does the Empirical Literature Tell Us?

Frame

2018

J of Financial Research

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu Abstract: The agency conflicts inherent in securitization are viewed by many as having been a key contributor to the recent financial crisis, despite the presence of various legal and economic constructs to mitigate them. A review of recent empirical research for the U.S. home mortgage market suggests that securitization itself may not have been a problem, but rather the origination and distribution of observably riskier loans. Low-documentation mortgages, for which asymmetric information problems are acute, performed especially poorly during the crisis. Securitized low-documentation mortgages performed better when included in deals where security issuers were affiliated with lenders or had significant reputational capital at stake and investors priced the risk of low-documentation loans via larger required equity tranches and/or higher security yields. Terms of use: Documents inJEL classification: G01, G21, G23, G28

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

Cited by 211 publications

References 8 publications

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

Origination Channel, Prepayment Penalties and Default

Agency Conflicts in Residential Mortgage Securitization: What Does the Empirical Literature Tell Us?

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