Income Falsification on Mortgage Applications During the Housing Bubble

59 Pages Posted: 22 Sep 2013 Last revised: 7 May 2015

See all articles by James DiLellio

James DiLellio

Pepperdine University - Graziadio School of Business and Management

Joetta Forsyth

Pepperdine University - Graziadio School of Business and Management

Date Written: March 3, 2014

Abstract

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

DiLellio, James and Forsyth, Joetta, Income Falsification on Mortgage Applications During the Housing Bubble (March 3, 2014). Available at SSRN: https://ssrn.com/abstract=2323102 or http://dx.doi.org/10.2139/ssrn.2323102

James DiLellio

Pepperdine University - Graziadio School of Business and Management ( email )

Malibu, CA
United States

Joetta Forsyth (Contact Author)

Pepperdine University - Graziadio School of Business and Management ( email )

Malibu, CA
United States

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