Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices

Review of Financial Studies

75 Pages Posted: 12 Dec 2018 Last revised: 17 Nov 2022

Date Written: February 1, 2022

Abstract

In 2007, as American housing markets started to decline, the government-sponsored enterprises dramatically increased their acquisitions of low FICO and high loan-to-value mortgages. By 2008, the agencies had reversed course by decreasing their high-risk acquisitions. I develop a theory in which large lenders temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure.

Keywords: Concentration, GSEs, Housing Booms and Busts, Mortgage Credit

JEL Classification: G01, G21, L11, L25, R21, R31

Suggested Citation

Gupta, Deeksha, Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices (February 1, 2022). Review of Financial Studies, Available at SSRN: https://ssrn.com/abstract=3290254 or http://dx.doi.org/10.2139/ssrn.3290254

Deeksha Gupta (Contact Author)

Johns Hopkins University ( email )

Baltimore, MD 20036-1984
United States

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