DP10476 Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market

Author(s): Giovanni Favara, Mariassunta Giannetti
Publication Date: March 2015
Keyword(s): bank concentration, fire sales, foreclosures, house prices
JEL(s): G01, G21, R31, R38
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10476

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.