Nonconforming Preferences: Jumbo Mortgage Lending and Large Bank Stress Tests

Abstract

The 2010s saw a profound shift towards jumbo mortgage lending by large banks that are regulated under the Dodd-Frank Act. Using data from the Home Mortgage Disclosure Act, we show that the “jumbo shift” is correlated with being subject to the Comprehensive Capital Analysis and Review (CCAR) stress tests, and that financial regulation caused CCAR-regulated banks to change preference for nonconforming relative to conforming loans of similar size. We discuss potential mechanisms through which regulation could have affected bank incentives.

Keywords: CCAR, mortgage lending, bunching

JEL Classification: C23, G21, G28