Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency
Coauthor(s): Ashlyn Aiko Nelson, Edward Vytlacil.
This paper presents a comprehensive analysis of mortgage delinquency between 2004 and 2008 using a unique loan-level dataset from a major national mortgage bank. Our analysis highlights two major problems underlying the mortgage crisis: a heavy reliance on mortgage brokers who tend to originate lower quality loans, and a high prevalence of low-documentation loans—known in the industry as "liars' loans"—which results in information falsification by borrowers. While up to three-quarters of the difference in delinquency rates between bank and broker channels can
be attributed to observable loan and borrower characteristics, all of the delinquency difference between full- and low-documentation mortgages is due to unobservable heterogeneity. We provide evidence that this unobserved heterogeneity results from income falsification among low-documentation loans. Further, we find little evidence that the loan pricing compensates for the high delinquency rates among the brokered and low-documentation loans.
Source: The Review of Economics and Statistics
Jiang, Wei, Ashlyn Aiko Nelson, and Edward Vytlacil. "Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency." The Review of Economics and Statistics 96, no. 1 (March 2014): 1-18.