Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define “income overstatement” in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatements are plagued with mortgage fraud according to independent measures.

Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the zip code-level correlation between IRS-reported income growth and growth in income reported on mortgage applications is always positive with one exception: the correlation goes to zero in the non-GSE market during the 2002 to 2005 period. Income reported on mortgage applications should not be used as true income in low credit score zip codes from 2002 to 2005. Englewood and Garfield Park are two of the poorest neighborhoods in Chicago with an average income of $24,000 in 2000 compared to $44,000 for the rest of the city. In 1996, almost 70% of the residents in these two neighborhoods had a credit score below 660, compared to 37% for the rest of Chicago. However, Englewood and Garfield Park experienced phenomenal growth of 55% in mortgage credit for home purchases from 2002 to 2005, when growth was only 27% for the rest of Chicago.