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

Author/Editor:

Sophia Chen ; Lev Ratnovski ; Yangfan Sun

Publication Date:

May 27, 2021

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

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 also ration credit to a significantly greater degree than when they ex-pand 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, these results imply that 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.

Series:

Working Paper No. 2021/151

Frequency:

regular

English

Publication Date:

May 27, 2021

ISBN/ISSN:

9781513573380/1018-5941

Stock No:

WPIEA2021151

Pages:

53

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