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Study Links ‘Lightly Regulated’ Lending to Foreclosures, Unemployment

A recent study by Jihad C. Dagher and Ning Fu of the ""International Monetary Fund"":http://www.imf.org/external/index.htm found a correlation between the increase in originations from ""lightly regulated"" non-bank lenders and the rise in foreclosures and unemployment.

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The authors believe stricter regulation could have prevented the housing crisis.

The working paper titled, ""_What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis,_"":http://www.imf.org/external/pubs/ft/wp/2011/wp11215.pdf states ""We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle.""

The authors assert that independent non-bank lending increased in nearly all counties across the United States during the boom years.

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In 2003, independent lenders originated about 31 percent of loans. However, when the market grew between 2003 and 2007, independent lenders contributed to more than 60 percent of that growth and the ensuing decrease between 2005 and 2007, according to the paper.

Between 2003 and 2007, independent lenders grew at a rate 23 percent more than that of banks.

Dagher and Fu assert a correlation between increased participation by independent lenders and rising housing prices during the boom years and then foreclosures in the bust years.

""[T]he the market share of independents is a strong predictor of the early rise in foreclosures,"" the authors state in the paper. They believe the market share of independents also predicts the contraction in credit, decrease in housing prices, and rise in unemployment.

According to Dagher and Fu, prior to the housing market crisis, banks functioned under much stricter regulation than independent, non-bank lenders.

The authors illustrate that the ""relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states.""

""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"" state Dagher and Fu.

About Author: Krista Franks Brock

Krista Franks Brock is a professional writer and editor who has covered the mortgage banking and default servicing sectors since 2011. Previously, she served as managing editor of DS News and Southern Distinction, a regional lifestyle publication. Her work has appeared in a variety of print and online publications, including Consumers Digest, Dallas Style and Design, DS News and DSNews.com, MReport and theMReport.com. She holds degrees in journalism and art from the University of Georgia.
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