Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985–2015
There is a debate about whether relaxed mortgage lending standards contributed to the boom—and ensuing bust—in the US housing market during the 2000s. Several studies have explored this question with data from the Home Mortgage Disclosure Act (HMDA). An early paper by Mian and Sufi (2009) claimed that mortgage credit rose disproportionately for low-income borrowers during the boom, and blamed this increase largely on a loosening of income requirements for mortgage lending. Yet Adelino, Schoar, and Severino (2016) found that during the boom, there was a relative increase only in the number of mortgages originated in low-income areas. There was no relative increase in the average size of new mortgages, as loans made to high-income and low-income borrowers rose by similar percentages. As pointed out in a response paper by Mian and Sufi (2017), precisely measuring the relationship between mortgage debt and income for new borrowers is complicated by the potential for borrower-income data in HMDA to be overstated when house prices are rising rapidly (as they were during the boom).
This paper develops some new data sources to provide more-conclusive evidence regarding the relationship between mortgage debt and income since the mid-1980s. It discusses some changes to mortgage underwriting procedures that allowed higher debt-to-income ratios at origination, a development that permitted lower-income borrowers to take out relatively more debt. However, these underwriting changes were driven by technological changes in the 1990s, some years before the boom. During the 2000s boom itself, average mortgage sizes rose proportionally for borrowers across the income distribution, as Adelino and co-authors found.