The Industrial Organization of the U.S. Residential Mortgage Market∗

We show that the U.S. residential single-family mortgage-origination market is highly concentrated once account is taken of the contractual coordination that arises from the correspondentand warehouse-funding channels. We represent these channels as a network, using the flow of loans through three strata of the loan origination market: origination, aggregation, and securitization. We develop a network representation of the origination market and demonstrate that it is a “small world,” in that most nodes are close in the network. We then rank-order the interlinked aggregators and securitizers using ex post mortgage foreclosure rates as a proxy for performance. Our findings suggest that these significant interlinkages in the mortgage origination network represent a previously under-appreciated source of systemic risk. Many apparently atomistic mortgage underwriters are, in fact, coordinated to act in parallel because of their funding relationships with the large, “too-big-to-fail” bank holding companies.