Working Paper: NBER ID: w19920
Authors: Sumit Agarwal; Gene Amromin; Itzhak Bendavid; Souphala Chomsisengphet; Douglas Evanoff
Abstract: We explore the effects of mandatory third-party review of mortgage contracts on consumer choice--including the terms and demand for mortgage credit. Our study is based on a legislative pilot carried out by the State of Illinois in a selected set of zip codes in 2006. Mortgage applicants with low FICO scores were required to attend loan reviews by financial counselors. Applicants with high FICO scores had to attend counseling only if they chose "risky mortgages." We find that low-FICO applicants for whom counselor review was mandatory did not materially change their contract choice. Conversely, applicants who could avoid counseling by choosing less risky mortgages did so. Ironically, the ultimate goals of the legislation (e.g., better loan terms for borrowers) were only achieved among the population that was not counseled. We also find significant adjustments in lender behavior as a result of the counseling program.
Keywords: mortgage counseling; borrower behavior; regulatory intervention; credit markets
JEL Codes: D14; D18; L85; R21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| mandatory counseling program (I19) | mortgage choices of low-FICO score applicants (G51) |
| mandatory counseling program (I19) | mortgage choices of higher-FICO score applicants (G51) |
| mandatory counseling program (I19) | lender behavior (G21) |
| lender behavior (G21) | mortgage choices of borrowers (G51) |
| mandatory counseling program (I19) | perceived burden of counseling (D91) |
| perceived burden of counseling (D91) | mortgage choices of borrowers (G51) |