Effects of Origination Channel and Information Falsification on Mortgage Delinquency
Author:
Wei Jiang, Columbia Business School
Ashlyn Aiko Nelson, Indiana University
Edward Vytlacil, Yale University
This paper presents a comprehensive predictive model of mortgage delinquency using a unique dataset from a major national mortgage bank containing all of its loan origination information from 2004 to 2008. Our analysis highlights two major agency problems underlying the mortgage crisis: an agency problem between the bank and mortgage brokers that results in lower quality broker-originated loans, and an agency problem between banks and borrowers that results in information falsification by borrowers of low-documentation loans—known in the industry as “liars’ loans”—especially when originated through a broker. We also document significant differences in loan performance by race/ethnicity that cannot be explained by observable risk factors or loan pricing.
This paper was presented on September 16th, 2009 at the FDIC's Seidman Center for the FHFA and the FDIC cohosted symposium on “Improving Assessment of the Default Risk of Single-Family Mortgages”. The symposium included sessions on: Collateral and Appraisal Issues, Underwriting Standards, and Issues in Default Modeling. Attendance included housing and mortgage market experts from industry, academia, and government . The research paper was selected from submissions received in response to a Call for Papers issued in the spring.
The Call for Papers can be downloaded here.