Nearly a third of all families purchasing new homes in 2006 obtained a mortgage from a financing company owned by or affiliated with a large homebuilder. Eighty percent of these loans were made by financing companies associated with one of the ten largest homebuilders in the country. In addition to accounting for a large share of new home sales and financing, homebuilders were particularly active in areas of the country where the subprime crisis was most acute (Arizona, California, Florida, and Nevada). As well as being important simply because of the number of loans that they underwrite, homebuilder financing arms are interesting because their incentives differ from those of unaffiliated lenders. Press accounts of homebuilder lending practices have focused on their incentive to sell homes and their purported willingness to extend unconventional mortgage products to borrowers with less-than-stellar credit histories. These factors have led to accusations that homebuilders contributed to the formation of the housing bubble and the ensuing foreclosure crisis. However, despite playing a potentially important role in explaining house price trends and mortgage defaults, homebuilder mortgage lending has received little research attention to date.

At first glance, the allegations of the nefarious role played by the homebuilders in the crisis are consistent with academic research on the behavior of lenders affiliated with a company that produced the good that is being financed. From an intuitive viewpoint, homebuilder financing arms may behave differently because their corporate parent profits from both the sale of the house and its financing and continues to lose money the longer the home stays in inventory. Consequently, such lenders have a strong motivation to find financing terms that will lead to a sale. This incentive may in turn lead to less screening of borrowers and to mortgage terms that get the deal done but may not be sustainable for the borrower. As the pace of home purchases slowed in 2006–07 and homebuilders were faced with growing inventories of unsold homes, these incentives may have become even stronger.