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SUMMARY:Credit Rationing\, Income Exaggeration\, and Adverse Selection in 
 the Mortgage Market - Brent W. Ambrose is the Smeal Professor of Real Esta
 te\, Director of the Institute for Real Estate Studies\, and Director of t
 he Smeal College Ph.D. Program at the Smeal College of Business at the Pen
 nsylvania State University. 
DTSTART:20151015T120000Z
DTEND:20151015T130000Z
UID:TALK57385@talks.cam.ac.uk
CONTACT:Cerf Admin
DESCRIPTION:We examine the role of borrower concerns about future credit a
 vailability in mitigating the effects of adverse selection and private inf
 ormation in the mortgage market in the run-up to the foreclosure crisis of
  2007 to 2010. We develop a simple theoretical model to motivate our empir
 ical analysis. Our results show that the majority of additional risk assoc
 iated with ``low-doc'' mortgages is due to adverse selection on the part o
 f borrowers who could verify income\, but chose not to.  We provide eviden
 ce that these borrowers\, who tend to live in relatively low-income neighb
 orhoods\, are more likely to inflate or exaggerate their income. Our paper
  contributes to the debate concerning income overstatement and mortgage cr
 edit expansion by extending the analysis of borrower income misrepresentat
 ion and adverse selection observed across mortgage types and borrower empl
 oyment status.  By focusing on differences in employment status\, we show 
 that the majority of adverse selection and income falsification is confine
 d to a specific borrower group that was never intended to utilize the low-
 documentation product.  Thus\, our results show that broad policies design
 ed to eliminate activities associated with excesses in mortgage originatio
 ns during the housing boom may have unintended consequences.
LOCATION:Room W4.03 Judge Business School
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