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

Author

Listed:
  • Sophia Chen
  • Mr. Lev Ratnovski
  • Yangfan Sun

Abstract

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.

Suggested Citation

  • Sophia Chen & Mr. Lev Ratnovski & Yangfan Sun, 2021. "Do Lenders Make Less-Informed Investments in High-Growth Housing Markets?," IMF Working Papers 2021/151, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2021/151
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    Keywords

    nonlocal lender; nonlocal mortgage lender; return volatility; high-growth market; lender control; Mortgages; Loans; Housing prices;
    All these keywords.

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