Was there a regulatory approval market for mortgages?

Peggy Crawford and Joetta Forsyth

Journal of Financial Economic Policy, 2015, vol. 7, issue 4, 354-365

Abstract: Purpose - – The purpose of this paper is to examine whether the underserved area requirements for Fannie Mae and Freddie Mac (the government-sponsored enterprises [GSEs]) and the community needs requirements of the Community Reinvestment Act (CRA) contributed to the house price run-up in the USA. Design/methodology/approach - – This paper predicts the incidence of “Rebounds”, which indicate that a mortgage had been previously denied, to provide evidence on whether certain regulations caused excessively risky mortgage originations. As a different lender rejected the loan given the interest rate that they were willing to charge and information on the borrower, a higher incidence of Rebounds provides evidence that lenders were more frequently disagreeing about loans. This can indicate differences in regulatory pressure or oversight across lenders. Findings - – This paper provides evidence that the GSEs were purchasing fewer Rebounds directly from lenders. However, evidence suggests that indirectly, the securitization market served as a conduit for Rebounds to the GSEs that needed to satisfy regulatory underserved area requirements. The necessity of complying with the CRA was found to increase Rebounds. Among regulators, the Federal Reserve was found to have been particularly associated with Rebounds. Originality/value - – The paper’s contribution comes from linking Rebounds to legislative and regulatory influences. This contributes to the literature on excess credit and fraud, as well as the effect of underserved area requirements and the CRA. Also, this paper adds a new dimension to the literature on securitization, by showing the influence of regulation on the securitization of risky mortgages.

Keywords: Mortgages; Government policy and regulation; Financial institutions and services; Corruption; Financial meltdown; Housing supply and markets (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfeppp:v:7:y:2015:i:4:p:354-365

DOI: 10.1108/JFEP-06-2015-0032

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