Work

Borrowing on the wrong side of the tracks: Evidence from mortgage loan discontinuities

Year: 2025

Type: article

Abstract: How much does the liquidity of the secondary market matter for the pricing of the housing market? In this paper, we investigate a discontinuity in the supply of mortgages called the "conforming loan limit." Mortgage loans smaller than this limit are eligible to be purchased by Fannie Mae and Freddie Mac -- and therefore, they are more easily underwritten and more readily supplied by lenders. Using county-level variation in this limit and a border discontinuity model with transaction-level data, we estimate that a 10% increase in this limit leads to a 3% to 4% increase in housing prices. We identify transmission mechanisms at both the intensive and extensive margins, as the higher conforming loan limit leads to larger individual loans and a greater volume of total lending. We show evidence that this effect is likely driven by greater availability, rather than lower interest pricing, of conforming loans.

Source: Journal of Banking & Finance

DOI: 10.1016/j.jbankfin.2025.107438

Authors: Anthony W. Orlando, Gerd Welke

Institution: California State Polytechnic University

Language: English

Topic: Housing Market and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,340

Funders: California Polytechnic State University, San Luis Obispo, Royal Economic Society