Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices

Gupta, Deeksha

doi:10.2139/ssrn.3290254

Cited by 2 publications

(3 citation statements)

References 40 publications

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“…up to 88% of conforming mortgages in some Metropolitan Statistical Areas (MSAs). Such extreme concentration can skew the incentives of a mortgage investor fearing a price drop (see Gupta 2018). A price drop threatens losses both by making strategic default more appealing and by worsening recovery in case of foreclosure, so the fear of a drop can encourage a mortgage investor to fight it off by boosting its assistance to people buying or retaining their homes.…”

Section: Introductionmentioning

confidence: 99%

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

Elul¹,

Gupta²,

Musto³

2020

Working Paper (Federal Reserve Bank of Philadelphia)

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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.

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Section: Introductionmentioning

confidence: 99%

“…AsGupta (2018) shows, it is not necessary to believe in a recovery to have incentives to prop-up. Even if a market downturn is persistent, a market participant with large outstanding mortgage exposure has incentives to prop-up prices.…”

mentioning

confidence: 99%

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

Elul¹,

Gupta²,

Musto³

2020

Working Paper (Federal Reserve Bank of Philadelphia)

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“…Section 3 presents individual agents' problems and defines the economic equilibrium for a given set of policies (regulation). Section 4 characterizes the economic equilibrium in two key benchmark settings -laissez-1While literature on the mortgage crisis in general is too vast to list here, we do want to single out Gupta (2018), who highlights how decisions of (large) lenders to extend risky mortgages affected house prices.…”

Section: Introductionmentioning

confidence: 99%

The Political Economy of Financial Regulation

Avgouleas¹,

Donald

2019

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Loose financial regulation encourages some banks to adopt a risky strategy of specializing in residential mortgages. In the event of an adverse aggregate housing shock, these banks fail. When banks do not fully internalize the losses from such failure (due to limited liability or deposit insurance), they offer mortgages at less than actuarially fair interest rates. This opens a door to home-ownership for some young low net-worth individuals. In turn, the additional demand from these new homebuyers drives up house prices. All of this leads to non-trivial distribution of gains and losses from lax regulation amongst the households. Renters and individuals with large non-housing wealth suffer from the fragility of the banking system induced by the lax regulation. On the other hand, some young middle-income households are able to get a mortgage and buy a house, thus benefiting from the lax regulation. Furthermore, the current (old) homeowners benefit from the increase in the price of their houses. If the latter two groups constitute a majority of the population, then regulatory failure can be an outcome of a democratic political process. * The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, the Federal Reserve System, or the Bank of Canada.

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Too Much Skin-in-the-Game?: The Effect of Mortgage Market Concentration on Credit and House Prices

Cited by 2 publications

References 40 publications

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

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

The Political Economy of Financial Regulation

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