Understanding the Evolution in Mortgage Pricing Strategy: Do Neighborhood Factors Matter?
37 Pages Posted: 28 May 2020
Date Written: March 25, 2020
This paper analyzes mortgage lenders' strategy in pricing loans intended for sale to prime market. Using the Single-Family Loan-Level Data set obtained from Freddie Mac, we find evidence that lenders adjust their pricing behavior according to the changing lending environment. In particular, conditional on a rich set of loan and borrower characteristics, lenders heavily base the pricing decision on some unexplored neighborhood heterogeneities that cannot be explained by observed macro- and socio-economic factors in most of the year cohorts. Such regional disparities in mortgage rates attenuate remarkably in the subprime securitization boom, during which loan originators begin to shift their reliance from borrower’s neighborhood to variables reported to investors in setting mortgage rates. By contrast, the regional variations in mortgage rates become particularly pronounced in the run-up and the aftermath of the expansion of subprime securitization, when mortgage rates depend largely on borrower’s neighborhood and the reliance on reported variables is alleviated. These findings are indicative of a “spillover effect” of the differential pricing strategy from the subprime market to prime market in the sense that lender's reliance on borrower's neighborhood and hard information temporally complement each other. Moreover, the unexplored regional factors endowed with significant power in explaining the variations in mortgage rates are suggestive of regional-based discrimination in loan price.
Keywords: Loan Pricing, Neighborhood Effect, Mortgage Securitization
JEL Classification: D1, G1, R2
Suggested Citation: Suggested Citation