Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market

Research output: Contribution to journalArticle

5 Citations (Scopus)

Abstract

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low-doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low-doc loan product would result in credit rationing against self-employed borrowers.

Original languageEnglish (US)
Pages (from-to)2637-2686
Number of pages50
JournalJournal of Finance
Volume71
Issue number6
DOIs
StatePublished - Dec 1 2016

Fingerprint

Income
Adverse selection
Credit rationing
Mortgage market
Loans
Great Recession
Misrepresentation
Mortgages
Credit availability
Regulatory change

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

@article{0dec5e0195214702a706a0349626c2cb,
title = "Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market",
abstract = "We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low-doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low-doc loan product would result in credit rationing against self-employed borrowers.",
author = "Ambrose, {Brent William} and James Conklin and Jiro Yoshida",
year = "2016",
month = "12",
day = "1",
doi = "10.1111/jofi.12426",
language = "English (US)",
volume = "71",
pages = "2637--2686",
journal = "Journal of Finance",
issn = "0022-1082",
publisher = "Wiley-Blackwell",
number = "6",

}

Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market. / Ambrose, Brent William; Conklin, James; Yoshida, Jiro.

In: Journal of Finance, Vol. 71, No. 6, 01.12.2016, p. 2637-2686.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Credit Rationing, Income Exaggeration, and Adverse Selection in the Mortgage Market

AU - Ambrose, Brent William

AU - Conklin, James

AU - Yoshida, Jiro

PY - 2016/12/1

Y1 - 2016/12/1

N2 - We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low-doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low-doc loan product would result in credit rationing against self-employed borrowers.

AB - We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low-doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low-doc loan product would result in credit rationing against self-employed borrowers.

UR - http://www.scopus.com/inward/record.url?scp=84995543689&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=84995543689&partnerID=8YFLogxK

U2 - 10.1111/jofi.12426

DO - 10.1111/jofi.12426

M3 - Article

VL - 71

SP - 2637

EP - 2686

JO - Journal of Finance

JF - Journal of Finance

SN - 0022-1082

IS - 6

ER -