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What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

57 Pages Posted: 19 Dec 2010 Last revised: 4 Dec 2012

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Ning Fu

International Monetary Fund (IMF)

Multiple version iconThere are 3 versions of this paper

Date Written: June 9, 2011

Abstract

This article examines the impact of regulation on lending standards during the mortgage boom. We exploit the overall regulatory wedge between banks and independent mortgage companies (IMCs) and a variation in this regulatory wedge across states induced by a cross-sectional variation in state laws under which IMCs operated. The weakly regulated IMCs contributed disproportionately to the explosion in risky lending and to the subsequent rise in delinquency. Consistent with regulations imposing binding constraints on lending standards, we show that these patterns were significantly less pronounced in states with tighter regulations using a sample of county pairs straddling state borders. These and other findings in the paper highlight how inconsistent regulation of mortgage lenders has resulted in risky lending being increasingly channeled through the least regulated lenders during the boom, as market discipline deteriorated.

Keywords: Regulation, Independent lenders, lending standards, county data, credit supply, matching estimator

JEL Classification: G01, G11, G12, G13, G14, G21

Suggested Citation

Dagher, Jihad C. and Fu, Ning, What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis (June 9, 2011). Available at SSRN: https://ssrn.com/abstract=1728260 or http://dx.doi.org/10.2139/ssrn.1728260

Jihad C. Dagher (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ning Fu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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