The Industrial Organization of the US Residential Mortgage Market

Richard Stanton, Johan Walden and Nancy Wallace ()
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Nancy Wallace: Haas School of Business, University of California, Berkeley, California 94720

Annual Review of Financial Economics, 2014, vol. 6, issue 1, 259-288

Abstract: We show that the US residential single-family mortgage-origination market is highly concentrated once account is taken of the contractual coordination that arises from the correspondent- and warehouse-funding channels. We represent these channels as a network, using the flow of loans through three strata of the loan origination market: origination, aggregation, and securitization. We develop a network representation of the origination market and demonstrate that it is a small world, in that most nodes are close in the network. We then rank-order the interlinked aggregators and securitizers using ex post mortgage foreclosure rates as a proxy for performance. Our findings suggest that these significant interlinkages in the mortgage-origination network represent a previously underappreciated source of systemic risk. Many apparently atomistic mortgage underwriters are, in fact, coordinated to act in parallel because of their funding relationships with the large, too-big-to-fail bank holding companies.

Keywords: mortgage; securitization; network (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (12)

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