Forced Asset Sales and the Concentration of Outstanding Debt : Evidence from the Mortgage Market

We provide evidence that lenders differ in their ex post incentives to internalize price-default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and are thus less inclined to foreclose. Consistent with our conjecture, lenders are less likely to foreclose delinquent mortgages if they have retained a large fraction of the outstanding mortgages in a neighborhood in their portfolio. Arguably as a consequence, zip codes with higher concentration of outstanding mortgages experience smaller house prices declines. These results are not driven by zip code or lender unobservable characteristics