Liar’s Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency

54 Pages Posted: 18 Jun 2009 Last revised: 25 Oct 2011

See all articles by Wei Jiang

Wei Jiang

Columbia Business School - Finance and Economics; ECGI; NBER

Ashlyn Aiko Nelson

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA)

Edward Vytlacil

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 17, 2009

Abstract

This paper presents a comprehensive analysis of mortgage delinquency using a unique loan-level dataset from a major national mortgage bank from 2004 to 2008. Our analysis highlights two major agency problems underlying the mortgage crisis: one between the bank and mortgage brokers that results in lower quality broker-originated loans, and the other between banks and borrowers that results in information falsification by borrowers of low-documentation loans - known in the industry as “liars’ loans” - especially when originated through a broker. While nearly all the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics, most of the difference between full- and low-documentation types is due to unobservable heterogeneity. Both differences are not fully compensated by the loan pricing.

Keywords: Liar's loan, mortgage delinquency, information falsification

JEL Classification: G01, G21, D13

Suggested Citation

Jiang, Wei and Nelson, Ashlyn Aiko and Vytlacil, Edward J., Liar’s Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency (June 17, 2009). Indiana University-Bloomington: School of Public & Environmental Affairs Research Paper No. 2009-06-02, Available at SSRN: https://ssrn.com/abstract=1421462 or http://dx.doi.org/10.2139/ssrn.1421462

Wei Jiang (Contact Author)

Columbia Business School - Finance and Economics ( email )

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Ashlyn Aiko Nelson

Indiana University Bloomington - School of Public & Environmental Affairs (SPEA) ( email )

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Edward J. Vytlacil

Yale University - Department of Economics ( email )

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New Haven, CT 06520-8281
United States

National Bureau of Economic Research (NBER)

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