Policy Uncertainty and Bank Mortgage Credit

Abstract

We document that banks reduce supply of jumbo mortgage loans when policy uncertainty increases in their headquarter states as measured by the timing of US gubernatorial elections. The reduction is larger for term-limited elections and close elections. We utilize high-frequency, geographically granular loan-level data to address an identification problem arising from changing local demand for loans: (i) we estimate a difference-in-difference specification with state/time or county/time fixed effects; (ii) banks reduce lending not just in their home states but also outside their home states when their home states hold elections; (iii) we observe important cross-sectional differences in the way banks with different characteristics respond to policy uncertainty. Overall, the findings suggest that policy uncertainty has a real effect on residential housing markets through banks' credit supply decisions and that it can spill over across states through lending by banks serving multiple states.

Keywords: Bank Mortgage Credit, Housing Market, Policy Uncertainty, Gubernatorial Elections

JEL Classification: G21, G28