Lender Steering in Residential Mortgage Markets
Real Estate Economics, Forthcoming.
33 Pages Posted: 6 Oct 2015 Last revised: 5 May 2017
Date Written: December 7, 2016
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: Suggested Citation