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Mortgage Market Concentration, Foreclosures and House Prices

  • Giovanni Favara

    (Federal Reserve Board)

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.

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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 643.

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Date of creation: 2013
Date of revision:
Handle: RePEc:red:sed013:643
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. Benjamin J. Keys & Amit Seru & Vikrant Vig, 2012. "Lender Screening and the Role of Securitization: Evidence from Prime and Subprime Mortgage Markets," Review of Financial Studies, Society for Financial Studies, vol. 25(7), pages 2071-2108.
  2. von Lilienfeld-Toal, Ulf & Mookherjee, Dilip, 2011. "How Did the US Housing Slump Begin? The Role of the 2005 Bankruptcy Reform," Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48726, Verein für Socialpolitik / German Economic Association.
  3. Sandra E. Black & Philip E. Strahan, 2002. "Entrepreneurship and Bank Credit Availability," Journal of Finance, American Finance Association, vol. 57(6), pages 2807-2833, December.
  4. Manuel Adelino & Kristopher Gerardi & Paul Willen, 2010. "What explains differences in foreclosure rates? a response to Piskorski, Seru, and Vig," FRB Atlanta Working Paper No. 2010-08, Federal Reserve Bank of Atlanta.
  5. Giovanni Favara & Jean Imbs, 2015. "Credit Supply and the Price of Housing," American Economic Review, American Economic Association, vol. 105(3), pages 958-92, March.
  6. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
  7. Agarwal, Sumit & Amromin, Gene & Ben-David, Itzhak & Chomsisengphet, Souphala & Evanoff, Douglas D., 2011. "The Role of Securitization in Mortgage Renegotiation," Working Paper Series 2011-2, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  8. John Y. Campbell & Stefano Giglio & Parag Pathak, 2009. "Forced Sales and House Prices," NBER Working Papers 14866, National Bureau of Economic Research, Inc.
  9. Andra C. Ghent, 2011. "Securitization and Mortgage Renegotiation: Evidence from the Great Depression," Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1814-1847.
  10. Piskorski, Tomasz & Seru, Amit & Vig, Vikrant, 2010. "Securitization and distressed loan renegotiation: Evidence from the subprime mortgage crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 369-397, September.
  11. Patrick Bolton & Howard Rosenthal, 2002. "Political Intervention in Debt Contracts," Journal of Political Economy, University of Chicago Press, vol. 110(5), pages 1103-1134, October.
  12. 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.
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