Mortgage Leverage and House Prices

Abstract

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