Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times

43 Pages Posted: 29 Apr 2020

See all articles by Ronel Elul

Ronel Elul

Federal Reserve Bank of Philadelphia

Deeksha Gupta

Carnegie Mellon University

David K. Musto

affiliation not provided to SSRN

Date Written: January, 2020

Abstract

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

Elul, Ronel and Gupta, Deeksha and Musto, David K., Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times (January, 2020). FRB of Philadelphia Working Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3587379 or http://dx.doi.org/10.21799/frbp.wp.2020.04

Ronel Elul (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3965 (Phone)

Deeksha Gupta

Carnegie Mellon University ( email )

Pittsburgh, PA 15213-3890
United States

David K. Musto

affiliation not provided to SSRN

No Address Available

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