Lender Steering in Residential Mortgage Markets

Sumit Agarwal, Brent William Ambrose, Vincent W. Yao

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In this article, we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan-to-value ratios (LTV) above 80%. Our empirical analysis focuses on propensity score-matched portfolios of piggyback and single-lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self-selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.

Original languageEnglish (US)
JournalReal Estate Economics
DOIs
StateAccepted/In press - Jan 1 2017

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Mortgage market
Loans
Mortgages
Insurance
Self-selection
Causal effect
Incentives
Banking deregulation
Empirical analysis
Propensity score
Interstate banking
Prepayment
Default rate
Risk characteristics
Supply side

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

Cite this

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abstract = "In this article, we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan-to-value ratios (LTV) above 80{\%}. Our empirical analysis focuses on propensity score-matched portfolios of piggyback and single-lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self-selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.",
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Lender Steering in Residential Mortgage Markets. / Agarwal, Sumit; Ambrose, Brent William; Yao, Vincent W.

In: Real Estate Economics, 01.01.2017.

Research output: Contribution to journalArticle

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