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

68 Pages Posted: 30 May 2024

See all articles by W. Scott Frame

W. Scott Frame

Bank Policy Institute

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Erik J. Mayer

University of Wisconsin-Madison, Finance Department

Billy Xu

University of Rochester - Simon Business School

Lawrence Chengzhi Zhao

Texas Tech University - Area of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 28, 2024

Abstract

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

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

W. Scott Frame

Bank Policy Institute ( email )

600 13th Street NW
Washington, DC 20005
United States

Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Erik J. Mayer

University of Wisconsin-Madison, Finance Department ( email )

975 University Avenue
Madison, WI 53706
United States

HOME PAGE: http://https://sites.google.com/site/erikjmayer/

Billy Xu

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Lawrence Chengzhi Zhao (Contact Author)

Texas Tech University - Area of Finance ( email )

Lubbock, TX 79409
United States

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