Too Much Skin-in-the-Game? : The Effect of Mortgage Market Concentration on Credit and House Prices

In 2007, as American housing markets started to decline, the government-sponsored enterprises (GSEs) dramatically increased their acquisitions of low-FICO and high loan-to-value (LTV) mortgages. By 2008, the agencies had reversed course decreasing their high-risk acquisitions. I develop a theory in which large lenders will temporarily increase high-risk activity at the end of a boom. In the model, lenders with many outstanding mortgages have incentives to extend risky credit to prop-up house prices. The increase in house prices lessens the losses they make on their outstanding portfolio of mortgages. As the bust continues, lenders slowly wind down their mortgage exposure