The political economy of the subprime mortgage credit expansion

We examine how special interests, measured by campaign contributions from the mortgage industry, and constituent interests, measured by the share of subprime borrowers in a congressional district, may have influenced U.S. government policy toward subprime mortgage credit expansion from 2002 to 2007. Beginning in 2002, mortgage industry campaign contributions increasingly targeted U.S. representatives from districts with a large fraction of subprime borrowers. During the expansion years, mortgage industry campaign contributions and the share of subprime borrowers in a congressional district increasingly predicted congressional voting behavior on housing related legislation. Such patterns do not hold for non-mortgage financial industry. The evidence suggests that both subprime mortgage lenders and subprime mortgage borrowers influenced government policy toward subprime mortgage credit expansion.