Working Paper: CEPR ID: DP15798
Authors: Dion Bongaerts; Francesco Mazzola; Wolf Wagner
Abstract: This paper examines whether the risk of a future collateral fire sale affects lending decisions. We study US mortgage applications and exploitexogenous variation in foreclosure frictions for identification. We find lenders to be less likely to approve mortgages when anticipated losses due to uncoordinated collateral liquidations are high, and when there iselevated risk of joint collateral liquidation. These results suggest thatfire-sale risk has implications for credit allocation, and that lenders' collective origination decisions mitigate fire sale risk ex-post. However,we also find the effects to be significantly weaker outside periods in which fire sales are salient.
Keywords: fire sales; credit supply; foreclosure laws; creditor concentration; joint liquidation risk; collateral
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fire sale risk (G33) | mortgage approval rates (G21) |
| foreclosure costs (G33) | fire sale risk on mortgage approval rates (G21) |
| lender market share (G21) | mortgage approval rates (G21) |
| fire sale risk (G33) | credit supply (E51) |
| fire sale risk (G33) | broader economy exposure to fire sale events (E44) |