Uniform Mortgage Regulation and Distortion in Capital Allocation
Review of Finance, Accepted
70 Pages Posted: 1 Nov 2017 Last revised: 7 Sep 2021
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: Suggested Citation