Working Paper: NBER ID: w19156
Authors: David S. Scharfstein; Adi Sunderam
Abstract: We present evidence that high concentration in local mortgage lending reduces the sensitivity of mortgage rates and refinancing activity to mortgage-backed security (MBS) yields. A decrease in MBS yields is typically associated with greater refinancing activity and lower rates on new mortgages. However, this effect is dampened in counties with concentrated mortgage markets. We isolate the direct effect of mortgage market concentration and rule out alternative explanations based on borrower, loan, and collateral characteristics in two ways. First, we use a matching procedure to compare high- and low-concentration counties that are very similar on observable characteristics and find similar results. Second, we examine counties where concentration in mortgage lending is increased by bank mergers. We show that within a given county, sensitivities to MBS yields decrease after a concentration-increasing merger. Our results suggest that the strength of the housing channel of monetary policy transmission varies in both the time series and the cross section. In the cross section, increasing concentration by one standard deviation reduces the overall impact of a decline in MBS yields by approximately 50%. In the time series, a decrease in MBS yields today has a 40% smaller effect on the average county than it would have had in the 1990s because of higher concentration today.
Keywords: Mortgage Lending; Refinancing Activity; Mortgage Rates; Market Concentration; Monetary Policy
JEL Codes: E44; E52; G21; G23; L85
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decrease in MBS Yields (E43) | Increase in Refinancing Activity (G21) |
| Decrease in MBS Yields (E43) | Decrease in Mortgage Rates (G21) |
| Mortgage Market Concentration (G21) | Fewer Borrowers Refinancing (G51) |
| Decline in MBS Yields (E43) | Diminished Impact Over Time (C41) |
| Mortgage Market Concentration (G21) | Sensitivity of Mortgage Rates to MBS Yields (E43) |
| Mortgage Market Concentration (G21) | Sensitivity of Refinancing Activity to MBS Yields (E43) |