Mortgage Market Concentration, Foreclosures, and House Prices
Posted: 28 May 2013
Date Written: May 3, 2013
This paper shows that in mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices, and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices are less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse.
Keywords: house prices, foreclosures, bank concentration
JEL Classification: G01, G21, R31, R38
Suggested Citation: Suggested Citation