How income fraud made the housing bubble worse

http://www.eurekalert.org/pub_releases/2015-02/puww-hif021615.php


Public Release: 16-Feb-2015
Princeton University, Woodrow Wilson School of Public and International Affairs

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The researchers reveal that, in low-income zip codes, IRS-reported incomes and earnings reported on mortgages in fact differed wildly from 2002 to 2005. The researchers place the blame for falsified earnings listed on mortgage applications -- which the researchers call "buyer income overstatement" -- on brokers producing mortgages intended to be sold as securities. They found that this type of mortgage fraud spiked in low-income zip codes from 2002 to 2005, and originated from private-label issuers, not government-sponsored enterprises.

The research shows that fraud -- not economic prosperity -- was the reason people in low-income areas received a greater number of mortgages in the early 2000s, said paper coauthor Atif Mian, the Theodore A. Wells '29 Professor of Economics and Public Affairs and director of the Julis-Rabinowitz Center for Public Policy and Finance. At the time, credulous media and officials chalked up spikes in home purchases and approved mortgages in impoverished areas to gentrification, he said.

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"I think one of the most interesting questions raised by our analysis is: why did mortgage fraud explode from 2002 to 2005? One potential answer is that the outward shift in mortgage credit supply itself was responsible for higher fraud. Press reports show that fraudulent overstatement was perpetrated by brokers originating mortgages designed to be sold into the non-agency securitization market.

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