Borrower Misreporting and Loan Performance



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    • Mark J. Garmaise is at UCLA Anderson. I thank the U.S. financial institution for providing the data. I am grateful for comments from Zhaohui Chen, Cam Harvey (the Editor), Justin McCrary, Tomek Piskorski, Amit Seru, an anonymous Associate Editor, and two anonymous referees, as well as from seminar participants at the SFS Cavalcade, the Summer Real Estate Symposium, the WFA, the Peruvian Banking Superintendency (SBS), and UCLA.


Borrower misreporting is associated with seriously adverse loan outcomes. Significantly more residential mortgage borrowers reported personal assets just above round number thresholds than just below. Borrowers who reported above-threshold assets were almost 25 percentage points more likely to become delinquent (mean delinquency was 20%). For applicants with unverified assets, the increase in delinquency was greater than 40 percentage points. Misreporting was most frequent in areas with low financial literacy or social capital. Incorporating behavioral cues such as threshold effects into a risk assessment model improves its ability to uncover delinquencies, though at a cost of mischaracterizing some safe loans.