Ditching the Middle Class with Financial Regulation

60 Pages Posted: 4 Sep 2016 Last revised: 10 Feb 2017

Francesco D'Acunto

University of Maryland - Robert H. Smith School of Business

Alberto G. Rossi

University of Maryland - Department of Finance

Date Written: February 2, 2017

Abstract

We analyze the effects of a recent piece of financial regulation -- Dodd-Frank -- on mortgage originations. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but also increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Credit to low-income households was unaffected. Large lenders found reacting to Dodd-Frank to be less costly. We thus instrument households' exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. We find that -- even though counties with small and large lenders are similar in terms of observable characteristics -- the redistribution of credit from the middle class to the wealthy was higher in counties more exposed to large lenders. Results hold at the individual-loan level and zip-code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. The collapse of the private-label securitization market, banks' risk-management concerns, wealth polarization after the crisis, and pre-crisis indebtment do not explain the results.

Keywords: Mortgage Market, Financial Crisis, Dodd-Frank, Household Finance, Great Recession, Banking

JEL Classification: D78, D92, G18, G21, G23, H32, K22

Suggested Citation

D'Acunto, Francesco and Rossi, Alberto G., Ditching the Middle Class with Financial Regulation (February 2, 2017). Robert H. Smith School Research Paper No. RHS 2833961. Available at SSRN: https://ssrn.com/abstract=2833961

Francesco D'Acunto

University of Maryland - Robert H. Smith School of Business ( email )

College Park, MD 20742-1815
United States

HOME PAGE: http://terpconnect.umd.edu/~fdacunto

Alberto G. Rossi (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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