Working Paper

Did local lenders forecast the bust? Evidence from the real estate market

Abstract: This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. During the real estate run-up from 2002-06, home price growth negatively correlates with the share of loans made by local lenders, namely lenders with a branch in the respective county. Moreover, home prices fell less from 2006-09 in areas where more of the loans were made by local lenders. California foreclosure rates during the crisis are negatively correlated with local lending during the run-up. A 1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every 1,000 houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger.

Keywords: Mortgage loans; Foreclosure; Housing;

https://doi.org/10.26509/frbc-wp-201226

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers (Old Series)

Publication Date: 2012

Number: 1226