Liar’s Loans, Mortgage Fraud, and the Great Recession

Thomas Herndon

Review of Political Economy, 2020, vol. 31, issue 4, 479-508

Abstract: This paper contributes to research on misrepresentation in private residential mortgage-backed securities by using new data on losses from foreclosure to estimate higher than expected losses associated with income overstatement and adverse selection in no/low documentation loans, using full documentation loans as a counterfactual. Overall, no/low documentation loans account for $350 billion of the $500 billion lost from 2007 to 2012. No/low documentation loans lost an additional $5200 per loan, implying $97 billion of total no/low documentation losses were higher than expected. I also find underwriting exceptions differentially predict loss by documentation type, which provides evidence consistent with originator-led adverse selection.

Date: 2020
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DOI: 10.1080/09538259.2020.1747746

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