Working Paper: NBER ID: w20947
Authors: Atif R. Mian; Amir Sufi
Abstract: Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the zip code-level correlation between IRS-reported income growth and growth in income reported on mortgage applications is always positive with one exception: the correlation goes to zero in the non-GSE market during the 2002 to 2005 period. Income reported on mortgage applications should not be used as true income in low credit score zip codes from 2002 to 2005.
Keywords: mortgage fraud; income overstatement; credit expansion; economic outcomes; subprime lending
JEL Codes: E3; E4; E5; G01; G2; R31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| buyer income overstatement (D12) | higher levels of mortgage fraud (G21) |
| buyer income overstatement (D12) | increase in non-agency mortgages (G21) |
| buyer income overstatement (D12) | increase in low-documentation loans (G21) |
| buyer income overstatement (D12) | increased default rates (G33) |
| buyer income overstatement (D12) | increased poverty (I32) |
| buyer income overstatement (D12) | increased unemployment (J65) |
| buyer income overstatement (D12) | lower IRS income growth (H20) |
| buyer income overstatement (D12) | higher poverty rates (I32) |
| buyer income overstatement (D12) | weak correlation with IRS-reported income growth (D31) |
| mortgage application income data distortion (G51) | buyer income overstatement (D12) |