W. Scott Frame, Kristopher Gerardi, Erik J. Mayer, Billy Y. Xu, and Lawrence Chengzhi Zhao
Working Paper 2024-6
July 2024
Abstract:
We study the effect of Department of Justice lawsuits in the 2010s against large lenders for alleged fraud in the Federal Housing Administration (FHA) mortgage insurance program. The suits led to more than $5 billion in settlements and caused targeted banks and their peers to precipitously exit the FHA market. Difference-in-differences and triple differences tests exploiting geographic variation in exposure to exiting banks show a 20 percent reduction in FHA lending in heavily exposed areas. This reduction was not associated with improved underwriting standards or lower default rates. Large banks' FHA exit has significantly reduced low-income households' overall access to mortgage credit.
JEL classification: G18, G21, G51
Key words: household finance, banking, mortgage, credit access, litigation, housing
https://doi.org/10.29338/wp2024-06
A previous version of this paper was circulated under the title "Fraud Litigation and FHA Mortgage Lending 
." For helpful comments the authors thank Neil Bhutta, Alex Butler, Alan Crane, Piet Eichholtz, Michael Faulkender, Gustavo Grullon, Charlotte Haendler, Bob Hunt, Joseph Kalmenovitz, You Suk Kim, Lauren Lambie-Hanson, David Low, Alan Moreira, Junnatun Naym, Robert Novy-Marx, Christian Opp, Alex Priest, Gosia Ryduchowska, Ruchi Singh, James Vickery, James Weston, Edison Yu, and seminar participants at Rice University, the University of Rochester, the University of Virginia, Emory University, Texas Tech University, Australian National University, and the Federal Reserve Banks of Atlanta and Philadelphia. They also thank conference participants at the American Economic Association annual meeting, the AREUEA annual meeting, the AREUEA international conference, the FSU-UF Critical Issues in Real Estate Symposium, the University of Maryland Junior Finance Conference, the Hoyt Institute, the Financial Management Association annual meeting, the Boca-ECGI Corporate Finance and Governance Conference, the Eastern Finance Association annual meeting, and the INFORMS annual meeting. The views expressed are those of the authors and not necessarily those of the Structured Finance Association or its member firms, the Federal Reserve Bank of Atlanta, or any other entity within the Federal Reserve System. The authors are also grateful to the Conference of State Bank Supervisors (CSBS) for granting access to data from NMLS Consumer Access.SM The results and opinions are those of the authors and do not reflect the position of the CSBS.
Scott Frame is with the Structured Finance Association. Kristopher Gerardi is with the Federal Reserve Bank of Atlanta. Erik Mayer is with the Wisconsin School of Business, University of Wisconsin-Madison. Billy Xu is with the Simon Business School, University of Rochester. Lawrence Zhao is with the Rawls College of Business, Texas Tech University. Please address questions regarding content to Kristopher Gerardi, Federal Reserve Bank of Atlanta, 1000 Peachtree Street NE, Atlanta, GA 30309.
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