Local economic risk factors and the primary and secondary mortgage markets

This paper presents a cross-sectional analysis of the spatial distribution of loans in the primary and secondary mortgage markets. Aggregating loan or iginations to the MSA level, we examine the proportion of the market served by FHA and conventional lenders. We model the geographic differences in ma rket shares as a function of supply, demand, and economic risk factors. Res ults indicate that FHA market shares are higher in cities with higher econo mic risk characteristics. To examine the role of GSE activity, we model the spatial distribution of the disposition of conventional loans. Again, we f ocus on the impact of local economic risk factors on the proportion of loan s purchased by the GSEs, purchased by other financial institutions, or reta ined by the originating lender. Our results indicate that GSEs purchase rat es are fairly insensitive to local economic conditions indicating that they serve the primary market with little spatial variation. (C) 2000 Elsevier Science B.V. All rights reserved.