Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market

49 Pages Posted: 1 Feb 2014 Last revised: 1 Aug 2017

See all articles by Giovanni Favara

Giovanni Favara

Federal Reserve Board

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Date Written: June 18, 2016

Abstract

We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. Consistent with our conjecture, lenders are less likely to foreclose delinquent mortgages if they have retained a large fraction of the outstanding mortgages in a neighborhood in their portfolio. Arguably as a consequence, zip codes with higher concentration of outstanding mortgages experience smaller house prices declines. These results are not driven by zip code or lender unobservable characteristics.

Keywords: House Prices; Foreclosures; Bank Concentration; Fire Sales

JEL Classification: G01; G21; R31; R38

Suggested Citation

Favara, Giovanni and Giannetti, Mariassunta, Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market (June 18, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2388816 or http://dx.doi.org/10.2139/ssrn.2388816

Giovanni Favara

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

HOME PAGE: http://www.giovannifavara.com

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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