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