What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

 
Author/Editor: Dagher, Jihad ; Fu, Ning
 
Publication Date: September 01, 2011
 
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate
 
Summary: We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties’ economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.
 
Series: Working Paper No. 11/215
Subject(s): Bank regulations | Banks | Business cycles | Credit demand | Housing prices | Nonbank financial sector | United States

Author's Keyword(s): Regulation | independent mortgage companies | foreclosures | county performance | credit
 
English
Publication Date: September 01, 2011
Format: Paper
Stock No: WPIEA2011215 Pages: 57
Price:
US$18.00 (Academic Rate:
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