Competition in Local Mortgage Markets

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.