Informed and Uninformed Investment in Housing: The Downside of Diversification

The Review of Financial Studies, Forthcoming

EFA 2009 Bergen Meetings Paper

49 Pages Posted: 3 Sep 2008 Last revised: 11 Nov 2010

Elena Loutskina

University of Virginia - Darden School of Business

Philip E. Strahan

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: October 20, 2010

Abstract

Mortgage lenders that concentrate in few markets invest more in information collection than diversified lenders. Concentrated lenders focus on the information-intensive jumbo market and on high-risk borrowers. They are better positioned to price risks and thus ration credit less. Adverse selection, however, leads to higher retention of mortgages relative to diversified lenders. Finally, concentrated lenders have higher profits than diversified lenders, their profits vary less systematically, and their stock prices fell less during the 2007-08 credit crisis. The results imply that geographic diversification led to a decline in screening by lenders which likely played a role in the 2007-2008 Crisis.

Keywords: sub-prime mortgages, housing crisis

JEL Classification: G2

Suggested Citation

Loutskina, Elena and Strahan, Philip E., Informed and Uninformed Investment in Housing: The Downside of Diversification (October 20, 2010). The Review of Financial Studies, Forthcoming; EFA 2009 Bergen Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1262471

Elena Loutskina

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Philip E. Strahan (Contact Author)

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-6430 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://www2.bc.edu/~strahan

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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