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

Ronel Elul, Deeksha Gupta and David K. Musto

No 20-04R, Working Papers from Federal Reserve Bank of Philadelphia

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; Concentration; risk exposures (search for similar items in EconPapers)
JEL-codes: G01 G21 L25 R31 (search for similar items in EconPapers)
Pages: 43
Date: 2020-12-09
New Economics Papers: this item is included in nep-ban and nep-ure
Note: Revised December 2020 January 2020
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:87406

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DOI: 10.21799/frbp.wp.2020.04

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