Do Lenders Make Less-Informed Investments in High-Growth Housing Markets?

IMF Working Papers, May 27, 2021

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Nonlocal mortgage lenders with greater exposure to high-growth housing markets accept fewer loan applications in these markets and experience greater stock return volatility.
When these lenders expand to high-growth markets, they ration credit to a significantly greater degree than when they expand to other markets.
Mean-variance analyses show that nonlocal lenders’ exposure to high-growth markets is associated with more risk, more efficiency, and more return on mortgage portfolios.
Overall implication: expansion to high-growth markets leads to a decline in screening and riskier investment by nonlocal lenders, which may reflect a risk–return tradeoff in their portfolio strategy.

Nonlocal mortgage lenders with greater exposure to high-growth housing markets accept fewer loan applications in these markets.
These lenders experience greater stock return volatility when exposed to high-growth housing markets.
Expansion to high-growth markets is associated with greater credit rationing relative to expansion to other markets.
Mean-variance analyses associate exposure to high-growth markets with:
- more risk,
- more efficiency,
- more return on mortgage portfolios.

The observed patterns suggest a decline in borrower screening by nonlocal lenders when entering high-growth housing markets.
The change in lender behavior may reflect an explicit or implicit risk–return tradeoff in portfolio strategy: higher returns and efficiency come with higher risk and less stringent screening.

Subject: Financial institutions, Housing prices, Loans, Mortgages, Prices
Keywords: high-growth market, Housing prices, lender control, Loans, Mortgages, nonlocal lender, nonlocal mortgage lender, return volatility