Technological Innovation in Mortgage Underwriting and the Growth in Credit, 1985--2015

Posted: 6 Dec 2019

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Lara Loewenstein

Federal Reserve Bank of Boston

Paul Willen

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

Date Written: 2019-11-01

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 assessments 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 allowed. In this way, technology brought about an exogenous change in lending standards that was especially relevant for borrowers with low current incomes relative to their expected future incomes--in particular, young college graduates. By contrast, the data suggest that the credit expansion during the 2000s housing boom was an endogenous response to widespread expectations of higher future house prices, as average mortgage sizes rose for borrowers across the entire income distribution.

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 (2019-11-01). FRB of Boston Working Paper No. 19-11. Available at SSRN: https://ssrn.com/abstract=3498728 or http://dx.doi.org/10.29412/res.wp.2019.11

Christopher L. Foote (Contact Author)

Federal Reserve Bank of Boston ( email )

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Boston, MA 02210
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Lara Loewenstein

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
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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