Francesco D’Acunto is an Assistant Professor of Finance at the University of Maryland, R.H.Smith School of Business. He obtained a Phd in Finance at the University of California, Berkeley. His fields of interest are behavioral economics and finance, law and economics, political economy, and corporate finance. His recent work focuses on the effects of government intervention in lending market, including mortgages and corporate loans. Before completing his graduate studies, he held visiting positions at the University of Warwick and the University of Chicago. He holds a MSc. in Economics and Business Law from Tor Vergata University (Rome).
Alberto Rossi is an Assistant Professor of Finance at the Smith School of Business, University of Maryland at College Park. His research interests include theoretical and empirical asset pricing, asset management and household finance. His recent work concentrates on networks, institutional investors’ performance, and the risk-return trade-off in financial markets. He also studies the effect of regulation on mortgage lending. Professor Rossi’s work has been published in leading academic journals such as the Journal of Finance, the Review of Financial Studies, and the Journal of Financial Economics. His teaching interests include econometrics, investments and asset pricing. Before joining the Smith School, he worked as an economist at the Board of Governors of the Federal Reserve System in Washington DC. He received his PhD in Economics from the University of California, San Diego.
We analyze the effects of a recent piece of financial regulation – Dodd-Frank – on mortgage origina- tions. Dodd-Frank aimed at reducing mortgage fees and abuses against vulnerable borrowers, but also increased the costs of originating mortgages. We find it triggered a substantial redistribution of credit from middle-class households to wealthy households. Lenders reduced credit to middle-class households by 15%, and increased credit to wealthy households by 21%, after controlling for drivers of the demand for housing, local house prices, and foreclosures. Credit to low-income households was unaffected. Large lenders found reacting to Dodd-Frank to be less costly. We thus instrument house- holds’ exposure to Dodd-Frank with the pre-crisis share of mortgages originated by large lenders in each county. We find that – even though counties with small and large lenders are similar in terms of observable characteristics – the redistribution of credit from the middle class to the wealthy was higher in counties more exposed to large lenders. Results hold at the individual-loan level and zip- code level, at the intensive margin (amount lent) and extensive margin (number of loans originated), and for accepted and rejected loans. The collapse of the private-label securitization market, banks’ risk-management concerns, wealth polarization after the crisis, and pre-crisis indebtment do not explain the results.
