Mortgage Leverage and House Prices
62 Pages Posted: 9 Mar 2020 Last revised: 27 Aug 2020
Date Written: August 26, 2020
I measure the effect of mortgage debt-to-income restrictions on house prices using a change in the eligibility requirements imposed by Fannie Mae and Freddie Mac. I show that in 1999 Fannie Mae and Freddie Mac’s debt-to-income rules diverged, leading to tighter lending standards in places where local lenders had pre-existing relationships with Freddie Mac. Locations with tighter debt-to-income requirements experience an immediate relative reduction in house prices, showing that changes in lending standards have powerful effects. The effect builds over time and leads to a smaller house price boom and bust in these locations during the 2000s.
Keywords: mortgages, financial regulation, house prices
JEL Classification: G21, G28, R31
Suggested Citation: Suggested Citation