The prevalence and impact of misstated incomes on mortgage loan applications

► We examine the misstated-income problem during the recent mortgage-market crisis. ► We measure the difference in stated and actual incomes on loan applications. ► Our results suggest a substantial degree of income overstatement in 2005 and 2006. ► Income over-statement was more common in markets with higher house-price growth. Misstatement of income on mortgage loan applications (the “liar-loan” problem) is thought to have been a contributor to the boom and bust of mortgage markets. We provide nationwide measurements that reflect the degree to which incomes on mid-2000 home-purchase mortgage loan applications were overstated relative to the actual incomes of mortgage applicants. Our results suggest a substantial degree of income overstatement in 2005 and 2006, one consistent with the average mortgage application overstating income 15–20%. We find the tendency to misstate income was associated with markets with large home-price increases during the boom. There is little support for the proposition that income overstatement played a substantial role in subsequent mortgage defaults.