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Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times

Author

Listed:
  • Ronel Elul
  • Deeksha Gupta
  • David K. Musto

Abstract

When home prices threaten to decline, lenders bearing more of a community’s mortgage risk have an incentive to combat this decline with new lending that boosts demand. We test whether this incentive drove the government-sponsored enterprises (GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines grew from small to significant. To identify the effect we relate new risky lending to regional variation in the GSEs’ exposure and the interaction of this variation with home-price elasticity. We focus on the GSEs’ discretion across potential purchases by reference to the credit-score threshold that triggers manual underwriting. We conclude that this incentive helps explain the GSEs’ expansion of risky lending shortly before the financial crisis.

Suggested Citation

  • Ronel Elul & Deeksha Gupta & David K. Musto, 2020. "Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times," Working Papers 20-04R, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:87406
    DOI: 10.21799/frbp.wp.2020.04
    Note: Revised December 2020 January 2020
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    Cited by:

    1. Tim Zhang, 2022. "Uniform Mortgage Regulation and Distortion in Capital Allocation [Loan originations and defaults in the mortgage crisis: the role of the middle class]," Review of Finance, European Finance Association, vol. 26(4), pages 1011-1050.

    More about this item

    Keywords

    GSEs; Concentration; risk exposures;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • 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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