IMF: Bad lenders did more lobbying

December 29, 2009

An interesting piece of holiday research from the IMF … A Fistful of Dollars: Lobbying and the Financial Crisis

Our analysis establishes that financial intermediaries’ lobbying activities on specific issues are significantly related to both their mortgage lending behavior and their ex-post performance. Controlling for unobserved lender and area characteristics as well as changes over time in the macroeconomic and local conditions, lenders that lobby more intensively (i) originate mortgages with higher loan-to-income ratios, (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing  mortgage loan portfolios. Our analysis of ex-post performance comprises two pieces of evidence: (i) faster relative growth
of mortgage loans by lobbying lenders is associated with higher ex-post default rates at the MSA level in 2008; and (ii) lobbying lenders experienced negative abnormal stock returns during the main events of the financial crisis in 2007 and 2008.

In English that means that the lenders that lobbied most intensively tended to engage in riskier lending practices.

Not that we should be surprised.

(ht Margaret Doyle)

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