Competition in Local Mortgage Markets

Darren Aiello (UCLA)
Mark J. Garmaise (UCLA)
Gabriel Natividad (Universidad de Piura)

Abstract: We identify local lending shocks for competing mortgage providers by uncovering discontinuities in mortgage acceptance models. Shocks to standard measures of the concentration of its competitors do not explain a bank’s future lending patterns. Instead it is the expansion of a bank’s most aggressive competitor that leads to reduced lending, particularly at the very local level. A stronger shock to this competitor also leads a bank to charge higher interest rates, which are partially explained by the observable worsening of its borrower pool. Competition also has a negative effect on unobservable risk; it leads to worse mortgage performance.

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