Uniform Mortgage Regulation and Distortion in Capital Allocation

Review of Finance, Accepted

70 Pages Posted: 1 Nov 2017 Last revised: 7 Sep 2021

See all articles by Tim Zhang

Tim Zhang

University of Wyoming, College of Business

Date Written: July 25, 2021


The federal mortgage policy, the conforming loan limit (CLL), was spatially uniform before the 2008 crisis, despite remarkable heterogeneity across geography. I show that in areas that experienced a larger decline in the jumbo-loan share following an increase in the CLL, lenders raised jumbo-loan approval rates, lowered mortgage rates to defend short-term market share, extended credit to riskier borrowers, and incurred deteriorated asset quality in the long run. This result is not explained away by credit supply or demand changes, the bunching effect, or reverse causality. Instead, my evidence is consistent with a competition channel: the effect of CLL increases on jumbo-loan credit expansion is significantly exaggerated in a more competitive jumbo-lending market. Overall, my findings suggest that the securitization policies of the government-sponsored enterprises (GSEs) can induce spillovers on the jumbo-market segment and influence credit allocation.

Keywords: Federal policy design, Spatially uniform, Conforming loan limit, Jumbo mortgage, Regional variation, Credit supply, Bank competition

JEL Classification: E64, G21, G28, R12, R38

Suggested Citation

Zhang, Tim, Uniform Mortgage Regulation and Distortion in Capital Allocation (July 25, 2021). Review of Finance, Accepted, Available at SSRN: https://ssrn.com/abstract=3063003 or http://dx.doi.org/10.2139/ssrn.3063003

Tim Zhang (Contact Author)

University of Wyoming, College of Business

1000 E. University Avenue
Department 3275
Laramie, WY 82071
United States

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