Information Externalities and Home Mortgage Underwriting

Credit impairment and housing tenure status

“…Evidence also suggests that a lack of adequate information about the mortgage market among some households may result in higher-than-necessary borrowing costs for such households or may deter them from borrowing in the first place (Courchane et al, 2004). Another type of informational barrier that may curtail the flow of credit to particular segments of the mortgage market, discussed by Nakamura (1993), Ling and Wachter (1998) and Lang and Nakamura (1993), is based on the notion of information externalities. Nakamura theorizes that neighborhoods with few home sales generate too little information to support accurate property appraisals, leaving lenders less willing to extend credit.…”

“…The relatively large magnitude of the credit impairment and thin-file status effects in this study may reflect its more recent historical context that incorporates institutional changes in the mortgage market, as well as the distinct nature of the NSLY sample. Barakova et al used Survey of Consumer Finance data from 1989, 1995, and 1998, which are cross-sectional surveys, while our data focuses on long-run tenure status outcomes of a particular generational cohort as of 2004. The results may also reflect the additional steps taken here to address potential endogeneity of wealth and income constraints.…”

The role of information externalities and scale economies in home mortgage lending decisions

“…Our empirical models are similar in spirit to Ling and Wachter [9] and Harrison [7]. The estimates are obtained from logistic regression models in which the dependent variable is equal to one if the loan is accepted.…”

“…Calem [4] used nationwide Home Mortgage Disclosure Act (HMDA) data from 1990-1991 to explore the relationship between mortgage-lending decisions and recent home sales in the corresponding county, finding evidence that increased home sales reduces the probability that the mortgage loan is denied (in predominately white neighborhoods). Both Ling and Wachter [9] and Harrison [7] focused on data for particular metropolitan areas, measuring externalities at the Census tract level, and found support for an effect from recent home sales in the tract. Using nationwide data from 1990-1991, Avery, Beeson, and Sniderman [1] fail to find support for industry-level information externality effects of recent lending behavior within Census tracts.…”

Do the GSEs matter to low-income housing markets? An assessment of the effects of the GSE loan purchase goals on California housing outcomes

“…5 Lang and Nakamura [19] develop a model of mortgage lending that shows that, because of higher uncertainty, mortgage applications for properties located in neighborhoods with thin markets will be deemed riskier than applications from neighborhoods with high transaction volumes ("thick markets"). Many studies have since found empirical evidence in support of the theory, including Harrison [15], Calem [10], and Ling and Wachter [20]. We evaluate this question by exploiting variation in regulation governing the mortgage loan purchase activities of the GSEs (the 1992 GSE Act) and that which governs the mortgage loan origination activities of banking institutions (the CRA).…”