Working Paper: CEPR ID: DP10476
Authors: Giovanni Favara; Mariassunta Giannetti
Abstract: We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.
Keywords: bank concentration; fire sales; foreclosures; house prices
JEL Codes: G01; G21; R31; R38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High concentration of outstanding mortgages (G21) | Fewer foreclosures (G51) |
| Fewer foreclosures (G51) | Smaller declines in house prices (R31) |
| High concentration of outstanding mortgages (G21) | Smaller declines in house prices (R31) |
| High concentration of outstanding mortgages (G21) | More renegotiations of delinquent mortgages (G21) |
| High concentration of outstanding mortgages (G21) | Fewer foreclosures in areas with higher delinquency rates (G21) |
| High concentration of outstanding mortgages (G21) | Fewer foreclosures in non-judicial states (K35) |