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Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices

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  • Deeksha Gupta

    (University of Pennsylvania)

Abstract

During the housing boom, mortgage markets became increasingly concentrated with the government-sponsored enterprises (GSEs) being exposed to over 40 percent of U.S. mortgages in the 2000s. Research on the causes of the pre-crisis rise in risky lending has largely overlooked this trend. I develop a theory where this concentration in mortgage holdings can explain key features of the housing boom and bust. In the model, large lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. An increase in concentration can lead to a credit boom with worsening credit quality and a subsequent bust with widespread defaults. The model can generate a negative correlation between credit and income growth across areas (such as ZIP codes) while maintaining a positive correlation between them across borrowers reconciling empirical evidence that has previously seemed contradictory.

Suggested Citation

  • Deeksha Gupta, 2018. "Too Much Skin-in-the-Game? The Effect of Mortgage Market Concentration on Credit and House Prices," 2018 Meeting Papers 512, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:512
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    References listed on IDEAS

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    Cited by:

    1. Faia, Ester, 2019. "Insolvency-Illiquidity, Macro Externalities and Regulation," CEPR Discussion Papers 14055, C.E.P.R. Discussion Papers.
    2. Igor Livshits & Youngmin Park, 2019. "On the Political Economy of Financial Regulation," 2019 Meeting Papers 1465, Society for Economic Dynamics.

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