Lender Steering in Residential Mortgage Markets

Real Estate Economics, Forthcoming.

33 Pages Posted: 6 Oct 2015 Last revised: 5 May 2017

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Brent W. Ambrose

Pennsylvania State University

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business

Date Written: December 7, 2016

Abstract

In this paper we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan to value ratios (LTV) above 80%. Our empirical analysis focuses on propensity score matched portfolios of piggyback and single-lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self-selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.

Keywords: Steering, Securitization, Banking Deregulation, Insurance

JEL Classification: G2

Suggested Citation

Agarwal, Sumit and Ambrose, Brent W. and Yao, Vincent W., Lender Steering in Residential Mortgage Markets (December 7, 2016). Real Estate Economics, Forthcoming. . Available at SSRN: https://ssrn.com/abstract=2670211 or http://dx.doi.org/10.2139/ssrn.2670211

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Brent W. Ambrose (Contact Author)

Pennsylvania State University ( email )

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

Vincent W. Yao

Georgia State University - J. Mack Robinson College of Business ( email )

35 Broad Street
Atlanta, GA 30303-3083
United States

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