The Political Economy of Mortgage Lending
53 Pages Posted: 28 Nov 2018 Last revised: 6 Jan 2021
Date Written: December 29, 2020
We show that banks expand mortgage lending in the home states of Senate Banking Committee chairs, and the effect is more pronounced when the incumbent Senate Banking Committee chair is up for re-election. Consequently, these banks suffer worse mortgage asset quality in the following years, but their overall profitability increases after favoring the home states of the Banking Committee chairs. Our results are statistically and economically robust to a geographical regression discontinuity design that focuses on census tracts immediately adjacent to state borders, suggesting that the results are not driven by demand-side factors. We also find that banks strategically target politically active borrowers in the home states of Banking Committee chairs, and the effect is stronger when the bank is politically connected to the incumbent senator. Our findings suggest that political influences could distort private capital allocation beyond conventional political contribution channels.
Keywords: Political Influence, Mortgage Lending, HMDA, Senate Banking Committee
JEL Classification: D72, G21, G28
Suggested Citation: Suggested Citation