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

Abstract

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.