International Real Estate Review

Abstract

Concentration amongst the top 100 mortgage originators rose substantially during the Great Recession. Furthermore, Originator Profits and Unmeasured Costs (OPUCs), a proxy measure of the profit from originating residential mortgage loans also rose over the same period. Recent studies suggest that these increases are only partially explained by rational factors such as rising costs from increased regulatory burdens and changes in risk. We find statistically significant evidence that increasing concentration raised loan costs by 97 basis points using Vector Autoregressive (VAR) models during the Great Recession. This finding suggests that banks are exploiting increasing monopolistic power to increase profits and as such, consumers face rising costs as competition amongst lenders declines. Further to this issue, this study suggests that mortgage markets are not fully competitive and that the rates and fees charged to borrowers are in fact impacted by the level of competition amongst lenders.