Date Added: Jun 2009
During the housing boom, many subprime home buyers were not able to make a mortgage down payment and therefore were at risk of being rationed from the market. To resolve the issue, some buyers, sellers and intermediaries artificially expanded the scope of transactions by including items that cannot be collateralized. As a result, observed house prices were higher and mortgages larger, ultimately relaxing buyers' financial constraints. The paper estimates that between 2005 and 2008, up to 16% of highly leveraged (> 95% loan-to-value) transactions in Cook County, Illinois were inflated (with prices higher by 6% to 15%). Inflated transactions are more likely in low-income neighborhoods and when intermediaries have a high stake in the transaction.