Effect of Bank Mergers on the Price and Availability of Mortgage Credit

Abstract

Acquiring banks which gain large local market shares charge higher interest rates on non-agency mortgages after the acquisition compared to non-acquiring banks in the same local market; and this effect is stronger for subprime and Alt-A loans compared to prime loans. The corresponding effects for mortgages sold to Fannie Mae and Freddie Mac are economically insignificant. Acquiring banks increase approval rates for conventional mortgage applications but decrease approval rates for FHA mortgage applications, which are more likely to be sought by low-income applicants and minorities. In particular, acquiring banks decrease approval rates for Black and Hispanic applicants for both conventional and FHA mortgage applications. Overall, our results indicate that the effect of bank mergers on the price and availability of mortgage credit vary by borrower risk, income, and race.

Keywords: Bank mergers, mortgage interest rate, loan approval, non-agency mortgages

JEL Classification: G21, G34, L41, L11