The Unforeseen Impact: IPOs and Worsening Performance in Local Residential Mortgage Markets

This study examines the potential linkages between corporate public listing activities and performance of local residential mortgage markets with the use of a dataset of 1,100 initial public offerings (IPOs) in the United States (U.S.) from 2000 to 2018. While the existing literature suggests that IPOs may generate positive spillover effects, such as stimulating local businesses and housing markets, we find an unexpected negative correlation between long-term IPO activity and the average performance (particularly foreclosure rates and 90-day delinquency rates) of local mortgage loans. We explore several potential explanations for this relationship and find little evidence to support the hypothesis that it is driven by the post-IPO rising housing costs, exit of wealthier borrowers from the mortgage market due to welfare changes, or cashing out of home equity by local residents to finance their increased stock market participation. However, we do find that IPO activity is positively associated with the local loan-to-household ratio and median original loan-to-value (OLTV) ratio. Additionally, the negative correlation between IPO size and loan performance is stronger when excluding metropolitan statistical areas (MSAs) that are home to the headquarters of the largest mortgage lenders with nationwide operations. The relationship remains after we control for degree of banking restrictions on household loans. Our findings suggest a potential counter-cyclical shift in lending quality, similar to trends identified in the banking literature, where lenders may relax lending standards or reduce the quality of borrower assessments during business upswings following IPOs.