The Opioid Epidemic and Mortgage Lending: Credit or Demand Shock?

Abstract

Local mortgage credit access and availability are significantly impacted by rates of opioid abuse, with areas experiencing higher rates facing reduced credit accessibility. Small banks perceive the epidemic more as a negative demand shock, while large banks perceive it more as a credit risk. Greater exposure to the epidemic leads large banks to reduce local lending more compared to small banks. However, on a national level, large banks demonstrate a relatively smaller decrease in lending volume compared to small banks, as they can shift lending volume away to less exposed markets. The decline in lending volume for small banks primarily stems from decreases in deposit capital and consumer demand, whereas for large banks, it is driven by greater geographic diversification and a loss of soft information gathering abilities. Large banks transfer the risks associated with opioid abuse to borrowers by charging higher interest rates, reflecting not increases in default risks but instead increased information frictions due to the loss of soft information gathering abilities.

Keywords: opioid epidemic, mortgages, financial intermediation, banking, risk management

JEL Classification: G21, H31, I15, R31