Income Falsification on Mortgage Applications During the Housing Bubble
59 Pages Posted: 22 Sep 2013 Last revised: 7 May 2015
Date Written: March 3, 2014
We develop new measures to detect income falsification on mortgage applications during the housing bubble. We find that regulators failed to prevent income falsification. Additionally, regulatory requirements imposed on Fannie Mae and Freddie Mac (the “GSEs”) to promote lending in regulator-defined “underserved areas,” encouraged securitizers to purchase mortgages with falsified income from those areas, for resale to the GSEs. There were also regulations that required lenders that wished to merge across state lines to demonstrate that they were serving “community needs.” These regulations are found to have a similar effect. They encouraged lenders to make loans with falsified income to low-income areas, and may have also caused lenders to buy poor quality securitized loans. These findings provide a systemic explanation for the rise in poor quality subprime mortgages, particularly securitized mortgages.
Keywords: Mortgage, Mortgages, Fraud, RMBS, RMBSs, CMO, CMOs, Securitization GSE, GSEs, Fannie Mae, Freddie Mac, Underserved Areas, Housing Bubble
JEL Classification: G20, G21, G28, G180
Suggested Citation: Suggested Citation