Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market
Kristle Romero Cortés
Federal Reserve Banks - Federal Reserve Bank of Cleveland
November 8, 2012
25th Australasian Finance and Banking Conference 2012
This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than non-local 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. A1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every one thousand houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger.
Number of Pages in PDF File: 46
Keywords: Local Share, House price growth
JEL Classification: G21working papers series
Date posted: December 2, 2011 ; Last revised: November 8, 2012
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