A new report that analyzed the growth of mortgage lenders with little regulation found a close correlation between the group’s rise to prominence and unemployment, the expansion of the real estate bubble and the bubble’s bursting.
Non-bank mortgage originators with little regulation accounted for an increasing market share in virtually all U.S. counties during the buildup of the real estate bubble. Their market share grew from one-third in 2003 to more than 60 percent by 2005.
But the group disproportionately contributed to the recent boom-bust housing cycle.
Those findings were outlined in the 58-page report from the International Monetary Fund, What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis. The working paper was authored by Jihad C. Dagher and Ning Fu.
The report was based on “comprehensive data” for loan originations aggregated from the county level.
“Higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn,” the study said.
While banks face regulatory and capital requirements that are tightly enforced by federal regulators, their less regulated counterparts escaped such scrutiny. That helped independents achieve a growth rate between 2003 and 2005 that was 23 percent higher than that of banks.
The report went on, “We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states.”
The study found that the market share of these lenders as of 2005 is a strong predictor of how badly the housing market would flounder and how high unemployment would rise.
“Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode,” the authors concluded.
