This paper presents a comprehensive analysis of mortgage delinquency between 2004 and 2008 using a unique loan-level dataset from a major national mortgage bank. Our analysis highlights two major problems underlying the mortgage crisis: a heavy reliance on mortgage brokers who tend to originate lower quality loans, and a high prevalence of low-documentation loans—known in the industry as "liars' loans"—which results in information falsification by borrowers. While up to three-quarters of the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics, all of the delinquency difference between full- and low-documentation mortgages is due to unobservable heterogeneity. We provide evidence that this unobserved heterogeneity results from income falsification among low-documentation loans. Further, we find little evidence that the loan pricing compensates for the high delinquency rates among the brokered and low-documentation loans.
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Jiang, Wei, Ashlyn Aiko Nelson, and Edward Vytlacil. "Liar's Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency." The Review of Economics and Statistics 96, no. 1 (March 2014): 1-18.
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