Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market

61 Pages Posted: 21 Dec 2014 Last revised: 19 Dec 2015

See all articles by Brent W. Ambrose

Brent W. Ambrose

Pennsylvania State University

James Conklin

University of Georgia

Jiro Yoshida

Pennsylvania State University - Smeal College of Business; The University of Tokyo - Graduate School of Economics

Date Written: December 18, 2015

Abstract

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with "low-doc'' mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income, but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulations changes that have essentially eliminated the low-doc loan product would result in credit rationing against self-employed borrowers.

Keywords: Subprime Mortgages, Default, Adverse Selection, Moral Hazard, Reputation, Dodd-Frank Act, Credit Rationing

JEL Classification: G2, G01, G10, G18, D1, R2

Suggested Citation

Ambrose, Brent W. and Conklin, James and Yoshida, Jiro, Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market (December 18, 2015). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2541073 or http://dx.doi.org/10.2139/ssrn.2541073

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-867-0066 (Phone)
814-865-6284 (Fax)

James Conklin

University of Georgia ( email )

Athens, GA 30602-6254
United States

Jiro Yoshida

Pennsylvania State University - Smeal College of Business ( email )

368 Business Building
Smeal College of Business
University Park, PA 16802
United States
814-865-0392 (Phone)
814-865-6284 (Fax)

HOME PAGE: http://www.personal.psu.edu/juy18

The University of Tokyo - Graduate School of Economics ( email )

7-3-1 Hongo
Bunkyo-ku, Tokyo 113-0033
Japan
813-5841-5653 (Phone)
813-5841-5521 (Fax)

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