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Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015

Christopher Foote (), Lara Loewenstein and Paul S. Willen
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Paul S. Willen: Federal Reserve Bank of Boston

No 1816, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.

Keywords: Mortgage underwriting; housing cycle; technological change; credit boom (search for similar items in EconPapers)
JEL-codes: C55 D53 G21 L85 R21 R31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-pay and nep-ure
Date: 2018-12-07
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DOI: 10.26509/frbc-wp-201816

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