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Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices

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  • Deeksha Gupta

Abstract

In 2007, as American housing markets started to decline, the government-sponsored enterprises dramatically increased their acquisitions of low FICO and high loan-to-value mortgages. By 2008, the agencies had reversed course by decreasing their high-risk acquisitions. I develop a theory in which large lenders temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure.

Suggested Citation

  • Deeksha Gupta, 2022. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," The Review of Financial Studies, Society for Financial Studies, vol. 35(2), pages 814-865.
    • Handle: RePEc:oup:rfinst:v:35:y:2022:i:2:p:814-865.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhab027
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    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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