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Forced Asset Sales and the Concentration of Outstanding Debt: Evidence from the Mortgage Market
Author(s) -
FAVARA GIOVANNI,
GIANNETTI MARIASSUNTA
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12494
Subject(s) - collateralized debt obligation , default , debt , monetary economics , asset (computer security) , unobservable , economics , business , financial economics , financial system , finance , econometrics , collateral , computer security , computer science
We provide evidence that lenders differ in their ex post incentives to internalize price‐default externalities associated with the liquidation of collateralized debt. Using the mortgage market as a laboratory, we conjecture that lenders with a large share of outstanding mortgages on their balance sheets internalize the negative spillovers associated with the liquidation of defaulting mortgages and thus are less inclined to foreclose. We provide evidence consistent with our conjecture. Arguably as a consequence, zip codes with a higher concentration of outstanding mortgages experience smaller house prices declines. These results are not driven by unobservable zip code or lender characteristics.