Informational Advantages of Lending Locally
38 Pages Posted: 2 Dec 2011 Last revised: 13 Apr 2023
Date Written: February 1, 2015
Abstract
Banks decreased loan originations and retention in response to high home price appreciation during the run-up to the housing crisis when lending locally. This relationship holds even after addressing branch network endogeneity using historical branch networks and M&A activity as instrumental variables. For every 1 percent increase in home prices from 2002 to 2006, banks originated two fewer loans locally. Loans sold to Freddie Mac from banks with a local presence defaulted more, demonstrating superior knowledge on the part of the banks and exploring a new channel for adverse selection. Banks exited precisely the markets that experience price reversals.
Keywords: Mortgage Lending, House Price Growth, Loan Performance
JEL Classification: G21
Suggested Citation: Suggested Citation
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