Liar’s Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency
54 Pages Posted: 18 Jun 2009 Last revised: 25 Oct 2011
Date Written: June 17, 2009
This paper presents a comprehensive analysis of mortgage delinquency using a unique loan-level dataset from a major national mortgage bank from 2004 to 2008. Our analysis highlights two major agency problems underlying the mortgage crisis: one between the bank and mortgage brokers that results in lower quality broker-originated loans, and the other 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. While nearly all the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics, most of the difference between full- and low-documentation types is due to unobservable heterogeneity. Both differences are not fully compensated by the loan pricing.
Keywords: Liar's loan, mortgage delinquency, information falsification
JEL Classification: G01, G21, D13
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