Lending competition, regulation, and nontraditional mortgages

We examine the factors that determine the likelihood of borrowers using nontraditional mortgages (NTMs) prior to the Great Recession. Borrower choice depends on borrower characteristics such as income, levels of asset holdings, credit score, and age, and on market factors such as house price appreciation as shown in the literature. We add to the literature by showing that lending competition was significantly associated with the early growth of NTMs while growth of nonbank lending was associated with a later‐stage expansion of NTMs. We also find that state‐level antipredatory lending laws were more effective in restraining the origination of NTMs in markets with higher levels of lending competition.