Credit Rationing in the U.S. Mortgage Market: Evidence from Variation in FHA Market Shares

Abstract

This paper examines the nature of mortgage credit rationing across geographic markets and time. Particular attention is paid to the response of conventional mortgage supply to higher risk conditions associated with regional recessions. We develop a series of four indirect tests based on the spatial variation of the FHA share of mortgages, both endorsements and applications, as well as FHA and conventional rejection rates. Results of these four tests indicate that conventional mortgage underwriting criteria do not become more flexible and may even become more demanding when local economic conditions deteriorate. This result indicates the use of non-price credit rationing in the mortgage market and suggests a special role for FHA-insured mortgages as a mechanism for maintaining mortgage credit supply in declining housing markets.

The Varying Effects of Predatory Lending Laws on High-Cost Mortgage Applications

“…We assume that applicants understand that a subprime mortgage costs more than a prime mortgage and self-select to the appropriate market. 7 Following the approach of Ferguson and Peters (1995) and Ambrose, Pennington-Cross, and Yezer (2002), we assume that all of the information included in the application can be summarized by a single number (mortgage credit score or credit risk). Each loan applicant has a credit risk represented by 0 Յ Φ Յ 1.…”

The impact of local predatory lending laws on the flow of subprime credit

“…Ferguson and Peters [9] and Ambrose, Pennington-Cross and Yezer [2] present a more formal presentation of mortgage applications and lending standards which is similar to the concepts discussed here. 12.…”

“…In addition, during the same time period anecdotal evidence of predatory lending in the subprime market was gaining more public and regulatory attention. 2 Therefore, the welfare benefit associated with increased access to credit is believed to have been reduced by some unscrupulous lending in the subprime mortgage market.…”

Some Personal Reflections

“…Both Nigro (2003 and) and Elliehausen and Staten (2004) include a series of control variables associated with the location of the loan or loan application and the borrower because they may affect the demand or supply of subprime credit. In general, we expect that borrowers will be more likely to use/apply for subprime loans, and perhaps be rejected by subprime lenders, in locations with difficult economic conditions and when borrowers have lower income or are in minority areas (Calem, Gillen, andWachter, 2004, andPennington-Cross, 2002). Economic conditions are proxied by the countylevel unemployment rate, housing vacancy rate, and population growth rate.…”