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

43 Pages Posted: 9 Mar 2015

See all articles by Giovanni Favara

Giovanni Favara

International Monetary Fund (IMF)

Mariassunta Giannetti

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

Date Written: March 2015

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. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.

Keywords: bank concentration, fire sales, foreclosures, house prices

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 (March 2015). CEPR Discussion Paper No. DP10476. Available at SSRN: https://ssrn.com/abstract=2575780

Giovanni Favara (Contact Author)

International Monetary Fund (IMF)

Mariassunta Giannetti

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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