Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices
Review of Financial Studies
75 Pages Posted: 12 Dec 2018 Last revised: 17 Nov 2022
Date Written: February 1, 2022
Abstract
In 2007, as American housing markets started to decline, the government-sponsored enterprises dramatically increased their acquisitions of low FICO and high loan-to-value mortgages. By 2008, the agencies had reversed course by decreasing their high-risk acquisitions. I develop a theory in which large lenders temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure.
Keywords: Concentration, GSEs, Housing Booms and Busts, Mortgage Credit
JEL Classification: G01, G21, L11, L25, R21, R31
Suggested Citation: Suggested Citation