Partial Deregulation and Competition: Effects on Risky Mortgage Origination

55 Pages Posted: 8 Apr 2015 Last revised: 3 Mar 2017

Marco Di Maggio

Harvard Business School; National Bureau of Economic Research (NBER)

Amir Kermani

University of California, Berkeley; National Bureau of Economic Research (NBER)

Sanket Korgaonkar

Pennsylvania State University - Smeal College of Business

Date Written: November 17, 2016

Abstract

We exploit the OCC's preemption of national banks from state laws against predatory lending as a quasi-experiment to study the effect of deregulation and its interaction with competition on the supply of complex mortgages. Following the preemption ruling, national banks significantly increased their origination of loans with prepayment penalties by comparison with national banks in states without predatory-lending laws. We highlight a competition channel: in counties where OCC-regulated lenders had larger market shares, non-OCC lenders responded by increasing their use of riskier contract features, such as deferred amortization, adjustable rates and interest-only payments, which were not restricted by the state predatory-lending laws.

Keywords: Great Recession, subprime, complex mortgages, credit supply, competition, household debt, preemption rule

JEL Classification: E20, E30, E51, G28

Suggested Citation

Di Maggio, Marco and Kermani, Amir and Korgaonkar, Sanket, Partial Deregulation and Competition: Effects on Risky Mortgage Origination (November 17, 2016). Harvard Business School Finance Working Paper; Columbia Business School Research Paper No. 15-47. Available at SSRN: https://ssrn.com/abstract=2591434 or http://dx.doi.org/10.2139/ssrn.2591434

Marco Di Maggio (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Amir Kermani

University of California, Berkeley ( email )

2220 Piedmont Ave
Berkeley, CA 94720
United States

HOME PAGE: http://faculty.haas.berkeley.edu/amir/research/research.html

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Sanket Korgaonkar

Pennsylvania State University - Smeal College of Business ( email )

355 Business Building
University Park, PA 16802
United States

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