IMF Report: Lobbying and the Financial Crisis
On December 31, 2007, the Wall Street Journal reported that Ameriquest Mortgage and Countrywide Financial, two of the largest mortgage lenders in the nation, spent respectively $20.5 million and $8.7 million in political donations, campaign contributions, and lobbying activities from 2002 through 2006. The sought outcome, according to the article, was the defeat of anti-predatory lending legislation. In other words, timely regulatory response that could have mitigated reckless lending practices and the consequent rise in delinquencies and foreclosures was shut down by some mortgage lenders.
Such anecdotal evidence suggests that the political influence of the financial industry contributed to the 2007 mortgage crisis,which, in the fall of 2008, generalized in the worst bout of financial instability since the Great Depression. However, formal analysis of these assertions has so far remained scant. To the best of our knowledge, this is the first study to examine empirically the relationship between lobbying by financial institutions and mortgage lending in the run-up to the financial crisis.
We construct a unique dataset combining information on mortgage lending activities and lobbying at the federal level by the financial industry. By going through individual lobbying reports, we identify lobbying activities on issues specifically related to rules and regulations of consumer protection in mortgage lending, underwriting standards, and securities laws (henceforth, the “specific issues”).
The paper focuses on the mortgage lending behavior and performance of financial institutions. First, we analyze the relationship between lobbying and ex-ante characteristics of loans originated. We focus on three measures of mortgage lending: loan-to-income ratio(which we consider as a proxy for lending standards), proportion of loans sold (measuring recourse to securitization), and mortgage loan growth rates (positively correlated with risktaking).
Next, we analyze measures of ex-post performance of lobbying lenders. In particular, we explore whether, at the Metropolitan Statistical Area (MSA) level, delinquency rates – an indicator of loan quality - are associated with the expansion of lobbying lenders’ mortgage lending. More...