Mortgage Companies and Regulatory Arbitrage

Abstract:     
Mortgage companies (MCs) do not fall under the strict regulatory regime applicable to depository institutions. We empirically show that the resulting regulatory arbitrage allowed bank holding companies (BHCs) to circumvent capital requirements and avoid loan-related losses. As compared to bank subsidiaries, MC subsidiaries of BHCs originated riskier mortgages characterized by borrowers with lower credit scores, lower incomes, higher loan-to-income ratios, and higher default rates. Our results imply that regulation had the capacity to prevent the deterioration of pre-crisis lending standards, but only if consistently applied and enforced.

Number of Pages in PDF File: 45

Keywords: Banking Regulation, Regulatory Arbitrage, Shadow Banking, Lending Standards, Mortgage, Foreclosure, Bank, Crisis

JEL Classification: G21, G28, D12

working papers series