"Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency"
Publication type: Working paper
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 Alt-A or "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.
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