We provide novel evidence of misaligned incentives fueling a portion of the 2000s mortgage boom. We document that private mortgage insurance (PMI) companies expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail end of the housing boom, without changing pricing and despite knowledge of heightened housing risk. The expansion of PMI facilitated an unprecedented increase in Fannie and Freddie’s risky purchases, extending the mortgage boom into 2007 and precipitating their collapse. We argue that this unraveling reflects a general moral hazard problem in insurance, coupled with misaligned incentives in the government-backed mortgage market.

We use credit report data to study consumer financial distress in America. We report large, persistent disparities in financial distress across regions. To understand these patterns, we conduct a “movers” analysis. For collections and default, there is only weak convergence following a move, suggesting these types of distress are not primarily caused by place-based factors (e.g., local economic conditions and state laws) but instead reflect person-based characteristics (e.g., financial literacy and risk preferences). In contrast, for personal bankruptcy, we find a sizable place-based effect, which is consistent with anecdotal evidence on how local legal factors influence personal bankruptcy.