The Industrial Organization of the US Residential Mortgage Market

Posted: 25 Nov 2014

See all articles by Richard Stanton

Richard Stanton

University of California, Berkeley - Haas School of Business

Johan Walden

University of Lausanne; Swiss Finance Institute; University of California, Berkeley - Finance Group

Nancy Wallace

University of California, Berkeley - Real Estate Group

Date Written: December 2014

Abstract

We show that the US residential single-family mortgage-origination market is highly concentrated once account is taken of the contractual coordination that arises from the correspondent- and warehouse-funding channels. We represent these channels as a network, using the flow of loans through three strata of the loan origination market: origination, aggregation, and securitization. We develop a network representation of the origination market and demonstrate that it is a small world, in that most nodes are close in the network. We then rank-order the interlinked aggregators and securitizers using ex post mortgage foreclosure rates as a proxy for performance. Our findings suggest that these significant interlinkages in the mortgage-origination network represent a previously underappreciated source of systemic risk. Many apparently atomistic mortgage underwriters are, in fact, coordinated to act in parallel because of their funding relationships with the large, too-big-to-fail bank holding companies.

Suggested Citation

Stanton, Richard H. and Walden, Johan and Wallace, Nancy E., The Industrial Organization of the US Residential Mortgage Market (December 2014). Annual Review of Financial Economics, Vol. 6, pp. 259-288, 2014. Available at SSRN: https://ssrn.com/abstract=2530445 or http://dx.doi.org/10.1146/annurev-financial-110613-034324

Richard H. Stanton (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

Haas School of Business
545 Student Services Building #1900
Berkeley, CA 94720-1900
United States
(510) 642-7382 (Phone)
(510) 643-1412 (Fax)

Johan Walden

University of Lausanne

Lausanne, Vaud CH-1015
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of California, Berkeley - Finance Group ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 643-0547 (Phone)

HOME PAGE: http://www.haas.berkeley.edu/faculty/walden.html

Nancy E. Wallace

University of California, Berkeley - Real Estate Group ( email )

Berkeley, CA 94720-1900
United States

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