Tuesday, April 30, 2013

US local lenders knew about the housing bubble

Among the main culprits of the recent boom and bust in the US housing market that have been identified, the lenders and their excessive pushing of mortgages have been prominently featured. As pushing mortgages to people who cannot afford it seems to be a losing proposition, some pretty weird incentives must be in place for this to work. In other words, their must be some pretty sophisticated scheme in the lending business for some to make a gain from this. Local lenders, though, are not that sophisticated, as they handle most of the steps in the lending process themselves. As it turns out, they saw the debacle coming and pretty much got out of lending mortgages as soon as they felt things were getting excessive.

This is what you can conclude from the the analysis of Kristle Romero Cortés. She finds that where home prices where rising the fastest, the share of local lenders on the mortgage market was declining the fastest. In the subsequent bust, home prices were declining less in areas where local lenders were more present during loan origination. And looking at California only, foreclosures rates were lower where local lending was more prevalent. And all these results are even stronger where local lenders did not securitize the mortgages. What this shows is that there is still good value in homegrown lending, where the lender knows the markets intimately and knows to back off where things are getting dicey. Or, this can also be an indictment of the national mortgage chains like Countrywide Financial that were lending without thinking or had twisted incentives in place.

1 comment:

wnywj said...

The unsaid twisted incentive is obviously securitization. Now that it's been said, could it be that the originate-for-sale lenders were underpricing (in terms of fees, points, etc.) as well as selling what they knew to be junk, making it unprofitable for local lenders to operate where the originate-for-sale lenders operated on a large scale? There's quite a difference in incentives between a lender who holds a mortgage to maturity and one who originates for sale - the originate-for-sale lender seeks volume and discounts risk, whereas the traditional hold-to-maturity lender seeks a stable return from lending.