Competing for Deal Flow in Mortgage Markets
55 Pages Posted: 8 Sep 2017 Last revised: 7 Jun 2018
Date Written: May 8, 2018
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 mortgage acceptance models to generate local financing shocks, we link this instability to strong positive and convex feedback effects in lending: future applicants are especially attracted to the current fastest growing lenders. Local mortgage markets resemble tournaments; 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, and experience worse mortgage performance.
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