Research Shows Mortgage Fraud Made The Financial Crisis More Severe

New research is bringing to light one issue that is still met with controversy — the mortgage industry’s conduct during the housing boom. New evidence shows that lenders often broke the law.

An academic paper by economists Atif Mian of Princeton University and Amir Sufi of the University of Chicago details the practice of overstating a borrower’s income on mortgage applications in order to obtain a larger loan.

Report authors highlight the Chicago, Ill. neighborhoods of Englewoodk and Garfield Park — two of the city’s poorest neighborhoods with an average income of  of $24,000 in 2000 compared to $44,000 for the rest of the city, data show.

In 1996, almost 70% of the residents in these two neighborhoods had a credit score below 660, compared to 37% for the rest of Chicago, research shows. However, Englewood and Garfield Park experienced growth of 55% in mortgage credit for home purchases from 2002 to 2005, when growth was only 27% for the rest of Chicago. 

“One might conclude from these facts that Englewood and Garfield Park were turning a corner during the mortgage credit boom with higher income and economic growth,” the authors say in the report. “However, income reported to the IRS from these two neighborhoods paints a different portrait.”

IRS-reported annualized average income growth for these neighborhoods was 1.9% in nominal terms from 2002 to 2005, data show, while nominal income growth was 4 % per year for the rest of Chicago.

“Englewood and Garfield Park were getting poorer in both real and relative terms, and yet mortgage credit was expanding rapidly,” the authors say.

Instances of what was seen in Chicago played out nationwide, research shows. 

“The expansion of mortgage lending in neighborhoods such as Englewood and Garfield Park during the subprime mortgage boom was driven by an expansion in credit supply that was unrelated to improvements in borrower income,” the authors conclude based on their research.

Other researchers argue that the same subprime zip codes analyzed by Mian and Sufi were seeing high income individuals buying homes—buying homes in traditionally poor, low credit score neighborhoods. 

“Instead, we demonstrate that buyer income overstatement was higher in low credit score zip codes because of fraudulent misreporting of buyers’ true income,” Mian and Sufi say.

Written by Cassandra Dowell

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