Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985–2015

71 Pages Posted: 14 Dec 2018

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Lara Loewenstein

Federal Reserve Bank of Cleveland

Paul Willen

Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

Date Written: December 07, 2018

Abstract

The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.

Keywords: Mortgage underwriting, housing cycle, technological change, credit boom

JEL Classification: C55, D53, G21, L85, R21, R31

Suggested Citation

Foote, Christopher L. and Loewenstein, Lara and Willen, Paul S., Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985–2015 (December 07, 2018). FRB of Cleveland Working Paper No. 18-16, Available at SSRN: https://ssrn.com/abstract=3300374 or http://dx.doi.org/10.2139/ssrn.3300374

Christopher L. Foote

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States
617-973-3077 (Phone)
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Lara Loewenstein (Contact Author)

Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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