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

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  • Kristle Romero Cortes

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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  • Kristle Romero Cortes, 2012. "Did local lenders forecast the bust? Evidence from the real estate market," Working Papers (Old Series) 1226, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1226
    DOI: 10.26509/frbc-wp-201226
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    References listed on IDEAS

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    1. US local lenders knew about the housing bubble
      by Economic Logician in Economic Logic on 2013-04-30 18:57:00

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    Cited by:

    1. Erik P. Gilje & Elena Loutskina & Philip E. Strahan, 2016. "Exporting Liquidity: Branch Banking and Financial Integration," Journal of Finance, American Finance Association, vol. 71(3), pages 1159-1184, June.
    2. Li, Yongjia & Tahsin, Salman, 2021. "Home price appreciation and residential lending standards," Journal of Economics and Business, Elsevier, vol. 114(C).
    3. Erik Gilje & Elena Loutskina & Philip E. Strahan, 2013. "Exporting Liquidity: Branch Banking and Financial Integration," NBER Working Papers 19403, National Bureau of Economic Research, Inc.

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    Keywords

    Mortgage loans; Foreclosure; Housing;
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