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Working Paper

Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market

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This paper shows that mortgage lenders with a physical branch near the property being financed have better information about home-price fundamentals than nonlocal lenders. During the real estate run-up from 2002-06, home price growth negatively correlates with the share of loans made by local lenders, namely lenders with a branch in the respective county. Moreover, home prices fell less from 2006-09 in areas where more of the loans were made by local lenders. California foreclosure rates during the crisis are negatively correlated with local lending during the run-up. A 1 standard deviation increase in local loans is associated with 5 fewer foreclosures for every 1,000 houses. When local lenders retain loans for their portfolio rather than securitizing, the results for both home price growth and foreclosures are even stronger.
Topics
Lending and access to credit
Financial crises
11.13.2012ISSN 2573-7953 WP 12-26DOI 10.26509/frbc-wp-201226
Keywords local share, house price growth
JEL Classification Codes G21

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Cortés, Kristle Romero. 2012. “Did Local Lenders Forecast the Bust? Evidence from the Real Estate Market.” Federal Reserve Bank of Cleveland, Working Paper No. 12-26. https://doi.org/10.26509/frbc-wp-201226