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Possible income misstatement on mortgage loan applications: Evidence from the Canadian housing market

Kiana Basiri () and Babak Mahmoudi

MPRA Paper from University Library of Munich, Germany

Abstract: We construct a measure of possible income misstatement (PIM) for first-time homebuyers by quantifying the gap between growth in incomes reported on mortgage applications and growth in incomes reported on tax files from 2004 to 2014 in Canada. Using a two-stage least square framework to correct for the endogenous nature of house prices and PIM, we find robust evidence that part of the observed dispersion in PIM is caused by house price variation. This suggests borrowers have greater incentive to misstate income in high-priced markets. We report evidence that markets with a tendency for income misstatement also had higher default rates.

Keywords: Income Misstatement; Mortgage lending; Default (search for similar items in EconPapers)
JEL-codes: G21 R21 R28 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-ban and nep-ure
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Published in Real Estate Economics DOI: 10.1111/1540-6229.12310 (2020): pp. 1-19

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