Competing for Deal Flow in Local Mortgage Markets
54 Pages Posted: 8 Sep 2017 Last revised: 23 May 2019
Date Written: May 21, 2019
The U.S. mortgage market exhibits competitive instability in which some lenders emerge rapidly from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we link this instability to strong positive and convex feedback effects in mortgage financing: future applicants are especially attracted to the current fastest growing lenders. We show that the quickest-growing (not the largest) competitors divert applications and originations from other lenders. Facing a quickly-growing competitor, banks charge higher interest rates, partially due to the increased risk of their loans.
JEL Classification: R31, G21, D40
Suggested Citation: Suggested Citation