What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

29 Pages Posted: 12 Jun 2017

See all articles by Jihad C. Dagher

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Ning Fu

International Monetary Fund (IMF)

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Date Written: June 2017

Abstract

The weakly regulated independent mortgage companies (IMCs) had a vastly disproportional contribution to the expansion in risky credit during the mortgage boom and to the ensuing foreclosure crisis. We exploit a quasi‐experimental setting, created by the inconsistency of state lender regulations between banks and IMCs and their heterogeneity across states, to isolate the impact of regulation on lending standards using county‐pairs straddling state borders. We find that weaker state regulation of IMCs is associated with a sharper expansion of IMCs, particularly in risky high‐yield loans, which were also of worse quality in the weakly regulated states, based on subsequent delinquency.

Suggested Citation

Dagher, Jihad C. and Fu, Ning, What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis (June 2017). The Economic Journal, Vol. 127, Issue 602, pp. 996-1024, 2017. Available at SSRN: https://ssrn.com/abstract=2984365 or http://dx.doi.org/10.1111/ecoj.12353

Jihad C. Dagher (Contact Author)

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Ning Fu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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