Lender Steering in Residential Mortgage Markets

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Lender Steering in Residential Mortgage Markets

Lender Steering in Residential Mortgage Markets

Lender Steering in Residential Mortgage Markets Sumit Agarwal

Georgetown University, ushakri@yahoo.com

Brent W. Ambrose
Institute for Real Estate Studies and the Department of Risk Management, The Pennsylvania State University, bwa10@psu.edu

Vincent W. Yao
J. Mack Robinson College of Business, Georgia State University, wyao2@gsu.edu

December 6, 2016

Abstract
In this paper we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan to value ratios (LTV) above 80%. Our empirical analysis focuses on propensity score matched portfolios of piggyback and single-lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self-selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.

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