Mortgage Market Concentration, Foreclosures and House Prices

Giovanni Favara

No 643, 2013 Meeting Papers from Society for Economic Dynamics

Abstract: In mortgage markets with low concentration, lenders have an excessive propensity to foreclose defaulting mortgages. Though rational, foreclosure decisions by individual lenders may increase aggregate losses because they generate a pecuniary externality that causes house price drops and contagious strategic defaults. In concentrated markets, instead, lenders internalize the adverse effects of mortgage foreclosures on local house prices and are more inclined to renegotiate defaulting mortgages. Thus, negative income shocks do not trigger strategic defaults, foreclosure rates are lower, and house prices less volatile. We provide empirical evidence consistent with the theory using U.S. counties during the 2007-2009 housing market collapse.

Date: 2013
New Economics Papers: this item is included in nep-com, nep-dge and nep-ure
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