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Lending Next to the Courthouse: Exposure to Adverse Events and Mortgage Lending Decisions

Published online by Cambridge University Press:  11 April 2023

Da (Derek) Huo ,
Bo Sun ,
Mingzhu Tai  and
Yuhai Xuan Open the ORCID record for Yuhai Xuan [Opens in a new window]
Da (Derek) Huo
Affiliation:
University of Hong Kong Department of Real Estate and Construction [email protected]
Bo Sun
Affiliation:
University of Virginia Darden School of Business [email protected]
Mingzhu Tai
Affiliation:
University of Hong Kong Faculty of Business and Economics [email protected]
Yuhai Xuan*
Affiliation:
University of California, Irvine Paul Merage School of Business
*
[email protected] (corresponding author)
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Abstract

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Adverse market events can affect credit supply not only by hurting financial fundamentals but also by changing the risk-taking behaviors of individual decision-makers. We provide micro-level evidence of this individual decision-making channel in the U.S. mortgage market. We find that mortgage application rejection rates are more sensitive to foreclosure intensity when loan officers are more exposed to foreclosure news, despite the same housing market and bank fundamentals. Loans originated from the affected branches have lower ex post default rates, consistent with higher lending standards being applied. In the aggregate, this effect results in tighter credit supply during housing market downturns.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 5 , August 2024 , pp. 2375 - 2398
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank Sumit Agarwal, Ran Duchin, Dimas Fazio, Jarrad Harford (the editor), Zhiguo He, David Hirshleifer, Jose Liberti, Chen Lin, Wenlan Qian, Joao Santos, Arkodipta Sarkar, Hongjun Yan, and the conference participants at the 2021 Asian Bureau of Finance and Economic Research (ABFER) Annual Conference, the 2021 China International Conference in Finance, and the 2021 Midwest Finance Association Annual Meeting for helpful discussions and comments. We also thank Isabel Kitschelt for her excellent research assistance.

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