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Did local lenders forecast the bust? Evidence from the real estate market

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  • Kristle Romero Cortés

Abstract

This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. During the real estate run-up from 2002-06, home price growth negatively correlates with the share of loans made by local lenders, namely lenders with a branch in the respective county. Moreover, home prices fell less from 2006-09 in areas where more of the loans were made by local lenders. California foreclosure rates during the crisis are negatively correlated with local lending during the run-up. A 1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every 1,000 houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1226.

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Date of creation: 2012
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Handle: RePEc:fip:fedcwp:1226

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Keywords: Mortgage loans ; Foreclosure ; Housing;

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  1. Jayaratne, Jith & Strahan, Philip E, 1996. "The Finance-Growth Nexus: Evidence from Bank Branch Deregulation," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 639-70, August.
  2. Berger, Allen N. & Miller, Nathan H. & Petersen, Mitchell A. & Rajan, Raghuram G. & Stein, Jeremy C., 2005. "Does function follow organizational form? Evidence from the lending practices of large and small banks," Journal of Financial Economics, Elsevier, vol. 76(2), pages 237-269, May.
  3. Lerner, Josh, 1995. " Venture Capitalists and the Oversight of Private Firms," Journal of Finance, American Finance Association, vol. 50(1), pages 301-18, March.
  4. Favara, Giovanni & Imbs, Jean, 2010. "Credit Supply and the Price of Housing," CEPR Discussion Papers 8129, C.E.P.R. Discussion Papers.
  5. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
  6. Atif Mian & Amir Sufi, 2009. "The Consequences of Mortgage Credit Expansion: Evidence from the U.S. Mortgage Default Crisis," The Quarterly Journal of Economics, MIT Press, vol. 124(4), pages 1449-1496, November.
  7. Edward L. Glaeser & Joseph Gyourko & Albert Saiz, 2008. "Housing Supply and Housing Bubbles," NBER Working Papers 14193, National Bureau of Economic Research, Inc.
  8. Benjamin J. Keys & Tanmoy Mukherjee & Amit Seru & Vikrant Vig, 2010. "Did Securitization Lead to Lax Screening? Evidence from Subprime Loans," The Quarterly Journal of Economics, MIT Press, vol. 125(1), pages 307-362, February.
  9. O. Emre Ergungor, 2006. "Bank branch presence and access to credit in low-to-moderate income neighborhoods," Working Paper 0616, Federal Reserve Bank of Cleveland.
  10. Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
  11. Uday Rajan & Amit Seru & Vikrant Vig, 2010. "Statistical Default Models and Incentives," American Economic Review, American Economic Association, vol. 100(2), pages 506-10, May.
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  1. US local lenders knew about the housing bubble
    by Economic Logician in Economic Logic on 2013-04-30 13:57:00

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