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Discussion Paper Details

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Title: Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market

Author(s): Giovanni Favara and Mariassunta Giannetti

Publication Date: March 2015

Keyword(s): bank concentration, fire sales, foreclosures and house prices

Programme Area(s): Financial Economics

Abstract: We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. We find that zip codes with higher concentration of outstanding mortgages experience fewer foreclosures, more renegotiations of delinquent mortgages, and smaller house prices declines. These results are not driven by prior local economic conditions, mortgage securitization or unobservable lender characteristics.

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Bibliographic Reference

Favara, G and Giannetti, M. 2015. 'Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10476