Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times
43 Pages Posted: 29 Apr 2020
Date Written: January, 2020
When home prices threaten to decline, lenders bearing more of a community’s mortgage risk have an incentive to combat this decline with new lending that boosts demand. We test whether this incentive drove the government-sponsored enterprises (GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines grew from small to signiﬁcant. To identify the eﬀect we relate new risky lending to regional variation in the GSEs’ exposure and the interaction of this variation with home-price elasticity. We focus on the GSEs’ discretion across potential purchases by reference to the credit-score threshold that triggers manual underwriting. We conclude that this incentive helps explain the GSEs’ expansion of risky lending shortly before the ﬁnancial crisis.
Keywords: GSEs, Risk Exposure, Concentration
JEL Classification: R31, L25, G01, G21
Suggested Citation: Suggested Citation