Government Litigation Risk and the Decline in Low-Income Mortgage Lending

We study the effect of Department of Justice lawsuits in the 2010s against large lenders for alleged fraud in the Federal Housing Administration (FHA) mortgage insurance program. The suits led to over $5 billion in settlements and caused targeted banks and their peers to precipitously exit the FHA market. Difference-in-differences and triple differences tests exploiting geographic variation in exposure to exiting banks show a 20% reduction in FHA lending in heavily exposed areas. This reduction was not associated with improved underwriting standards or lower default rates. Large banks’ FHA exit has significantly reduced low-income households’ overall access to mortgage credit.

Keywords: Household Finance, Banking, Mortgage, Credit Access, Litigation, Housing

JEL Classification: D14, D18, G21, G28, G51, K20

Suggested Citation: Suggested Citation

Frame, W. Scott and Gerardi, Kristopher S. and Mayer, Erik J. and Xu, Billy and Zhao, Lawrence Chengzhi, Government Litigation Risk and the Decline in Low-Income Mortgage Lending (June 28, 2024). Available at SSRN: https://ssrn.com/abstract=4846638 or http://dx.doi.org/10.2139/ssrn.4846638