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.
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