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Mortgage Market Concentration, Foreclosures and House Prices

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  • Giovanni Favara

    (Federal Reserve Board)

Abstract

In mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse.

Suggested Citation

  • Giovanni Favara, 2013. "Mortgage Market Concentration, Foreclosures and House Prices," 2013 Meeting Papers 643, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:643
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    References listed on IDEAS

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