60 Pages Posted: 4 Sep 2016 Last revised: 10 Feb 2017
Date Written: February 2, 2017
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: 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