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Mortgage Companies and Regulatory Arbitrage


Yuliya S. Demyanyk


Federal Reserve Bank of Cleveland

Elena Loutskina


University of Virginia - Darden School of Business

May 3, 2013

FRB of Cleveland Working Paper WP 12-20R
Darden Business School Working Paper No. 2051001

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

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Date posted: May 5, 2012 ; Last revised: May 5, 2013

Suggested Citation

Demyanyk, Yuliya S. and Loutskina, Elena, Mortgage Companies and Regulatory Arbitrage (May 3, 2013). FRB of Cleveland Working Paper WP 12-20R; Darden Business School Working Paper No. 2051001. Available at SSRN: http://ssrn.com/abstract=2051001 or http://dx.doi.org/10.2139/ssrn.2051001

Contact Information

Yuliya Demyanyk (Contact Author)
Federal Reserve Bank of Cleveland ( email )
Research Department
East 6th & Superior
Cleveland, OH 44101-1387
United States
HOME PAGE: http://www.clevelandfed.org/Research/Economists/Demyanyk
Elena Loutskina
University of Virginia - Darden School of Business ( email )
P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)
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