Competing for Deal Flow in Local Mortgage Markets

Abstract

The U.S. mortgage market exhibits competitive instability in which some lenders emerge rapidly from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we analyze the impact on a lender of a surge in originations by its competitors. We show that the quickest-growing (not the largest) competitors divert applications and originations from other lenders. Facing a quickly-growing competitor, banks charge higher interest rates, partially due to the increased risk of their loans. Loan performance suffers for other lenders as the quickest-growing competitor's originations increase.

JEL Classification: R31, G21, D40