Lenders’ Pricing Strategy: Do Neighborhood Risks Matter?

48 Pages Posted: 28 May 2020 Last revised: 21 Jul 2021

See all articles by Sumit Agarwal

Sumit Agarwal

National University of Singapore

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison

Jia He

Nankai University

Yonglin Wang

Lingnan University

Multiple version iconThere are 2 versions of this paper

Date Written: July 9, 2021

Abstract

This paper explores the different pricing strategies of lenders who originate both government-sponsored enterprise (GSE) and non-GSE loans. We find that, conditional on loan and borrower characteristics and some observable local economic factors, mortgage rates on GSE loans vary significantly across regions. However, no sizable regional variation is observed in the loan amount or default risk. By contrast, the mortgage rates on non-GSE loans depend almost entirely on borrowers and loan characteristics. In addition, spatial variations in GSE mortgage rates are highly responsive to regional prepayment risk. The results are robust to various controls for neighborhood characteristics, including regional-level bank competition, household income, and racial composition. Overall, the findings offer a novel insight into how lenders adjust pricing strategies in response to a changing lending environment. It provides implications for the present and imminent dangers of housing bubbles predictions and the intensified refinancing wave following the COVID-19 pandemic.

Keywords: Refinancing waves, loan pricing, neighborhood effect, mortgage securitization

JEL Classification: G21, R11, R23

Suggested Citation

Agarwal, Sumit and Deng, Yongheng and He, Jia and Wang, Yonglin, Lenders’ Pricing Strategy: Do Neighborhood Risks Matter? (July 9, 2021). Available at SSRN: https://ssrn.com/abstract=3585134 or http://dx.doi.org/10.2139/ssrn.3585134

Sumit Agarwal

National University of Singapore ( email )

15 Kent Ridge Drive
Singapore, 117592
Singapore
8118 9025 (Phone)

HOME PAGE: http://www.ushakrisna.com

Yongheng Deng

Wisconsin School of Business, University of Wisconsin-Madison ( email )

4110 Grainger Hall
975 University Avenue
Madison, WI 53706
United States
+1 (608) 262-4865 (Phone)

HOME PAGE: http://bus.wisc.edu/faculty/yongheng-deng

Jia He

Nankai University ( email )

94 Weijin Road
Tianjin, 300071
China

Yonglin Wang (Contact Author)

Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

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