Mortgage Issued by Local Banks

Less Likely to Foreclose than Those Issued at a Distance

PHILADELPHIA – The American Mortgage System, a new book on the mortgage industry produced by the Penn Institute for Urban Research, shows that loans originated by the local branch of a bank were significantly less likely to experience foreclosure than those originated at a distance.  The book also presents other surprising information about low-income borrowers and the strengths of local banks.  First, the growth of the securitization market allowed local banks to disregard risks by selling the mortgage loans to third-party investors.  Second, low-income borrowers were most likely to be fooled into high-cost loans, maximizing the likelihood of default.  Third, the vast majority of this high-cost lending was completely unrelated to the Community Reinvestment Act, whose loans actually performed better on average than non-CRA loans.  

Edited by two leaders in the field of real estate and finance, Susan M. Wachter and Marvin M. Smith, The American Mortgage System demonstrates the importance of transparency, information, simplicity, and high risk management standards.  The volume’s contributors address the influence of the Community Reinvestment Act, which is often blamed for the crisis.  This collection of new studies includes extensive analysis of loan practices and the creation of unstable mortgage securities, presenting data largely unavailable until now.  More than simply a critique, The American Mortgage System offers solutions to the problems facing the future of American home ownership, including identifying asset price bubbles, calculating risk, and preventing discrimination in lending.

The American Mortgage System: Crisis and Reform.  Susan M. Wachter and Marvin M. Smith, Editors.  University of Pennsylvania Press.  2011.

A volume in the City in the Twenty-First Century series.

Susan M. Wachter is Richard B. Worley Professor of Financial Management and Professor of Real Estate and Finance at The Wharton School of the University of Pennsylvania and Professor of City and Regional Planning at PennDesign. She codirects the Penn Institute for Urban Research is coeditor of Growing Greener Cities: Urban Sustainability in the Twenty-First Century, also available from the University of Pennsylvania Press.

Marvin M. Smith is an economist and Community Development Research Advisor at the Federal Reserve Bank of Philadelphia.

Media contact: Andrew Shinn at 215-573-8386 or ashinn@upenn.edu