Concentration in Mortgage Lending, Refinancing Activity and Mortgage Rates

59 Pages Posted: 21 Jun 2013

See all articles by David S. Scharfstein

David S. Scharfstein

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Aditya Sunderam

Harvard University

Date Written: June 2013

Abstract

We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.

Suggested Citation

Scharfstein, David S. and Sunderam, Aditya, Concentration in Mortgage Lending, Refinancing Activity and Mortgage Rates (June 2013). NBER Working Paper No. w19156, Available at SSRN: https://ssrn.com/abstract=2282995

David S. Scharfstein (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
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HOME PAGE: http://www.people.hbs.edu/dscharfstein/

National Bureau of Economic Research (NBER)

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Aditya Sunderam

Harvard University ( email )

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