Federal Reserve Bank of Cleveland
Working Papers (Old Series)
Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015
The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.
Cite this item
Christopher L. Foote & Lara Loewenstein & Paul S. Willen, Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 1816, 07 Dec 2018.
- C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
- R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets
Keywords: Mortgage underwriting; housing cycle; technological change; credit boom
This item with handle RePEc:fip:fedcwp:1816
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