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Mortgage Loan Flow Networks and Financial Norms

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  • Richard Stanton
  • Johan Walden
  • Nancy Wallace

Abstract

We develop a theoretical model of a network of intermediaries whose optimal behavior is jointly determined, leading to heterogeneous financial norms and systemic vulnerabilities. We apply the model to the network of U.S. mortgage intermediaries from 2005 to 2007, using a data set containing all private-label, fixed-rate mortgages, with loan flows defining links. Default risk was closely related to network position, evolving predictably among linked nodes, and loan quality estimated from the model was related to independent quality measures, altogether pointing to the vital importance of network effects in this market. Received April 20, 2016; editorial decision July 11, 2017 by Editor Stijn Van Nieuwerburgh.

Suggested Citation

  • Richard Stanton & Johan Walden & Nancy Wallace, 2018. "Mortgage Loan Flow Networks and Financial Norms," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3595-3642.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:9:p:3595-3642.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx097
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    Cited by:

    1. Chen, Xiao & Chong, Zhaohui & Giudici, Paolo & Huang, Bihong, 2022. "Network centrality effects in peer to peer lending," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 600(C).
    2. Buchak, Greg & Matvos, Gregor & Piskorski, Tomasz & Seru, Amit, 2018. "Fintech, regulatory arbitrage, and the rise of shadow banks," Journal of Financial Economics, Elsevier, vol. 130(3), pages 453-483.
    3. Elliott, Matthew & Georg, Co-Pierre & Hazell, Jonathon, 2021. "Systemic risk shifting in financial networks," Journal of Economic Theory, Elsevier, vol. 191(C).
    4. Elliott, M. & Georg, C-P. & Hazell, J., 2020. "Systemic Risk-Shifting in Financial Networks," Cambridge Working Papers in Economics 2068, Faculty of Economics, University of Cambridge.
    5. Naomi Boyd & Peter Locke & Li Sun, 2020. "Trader networks and options risk management," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 40(7), pages 1031-1048, July.
    6. Adelino, Manuel & Gerardi, Kristopher & Hartman-Glaser, Barney, 2019. "Are lemons sold first? Dynamic signaling in the mortgage market," Journal of Financial Economics, Elsevier, vol. 132(1), pages 1-25.

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