Homebuilders, Affiliated Financing Arms and the Mortgage Crisis

Abstract

Nearly a third of all families purchasing new homes in 2006 obtained a mortgage from a financing company owned or affiliated with a large homebuilder. Corporate parent profits from both the sale of the house and from financing the mortgage, which may lead to less screening of borrowers and mortgage terms to get the deal done. In this paper, we use loan-level data from 2001 to 2008 to investigate the characteristics and default outcomes of home purchase mortgages underwritten by homebuilders, compared to mortgages issued by unaffiliated financial institutions. Our findings indicate that homebuilder financing affiliates do make loans to observably riskier borrowers, but the loans made by homebuilders have lower delinquency rates than unaffiliated lenders, even when loan and borrower characteristics are held constant.

Keywords: Homebuilders, Financial Crisis, Finance Arms of Homebuilders, Household Finance

JEL Classification: G1, G2