Finance Seminar（2018-01）

Topic: Uniform Mortgage Regulation and Distortion in Capital Allocation

Speaker: Teng Zhang, Georgia Institute of Technology

Time: Wednesday, 17 January, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract:

The U.S. economy is largely influenced by local features, but some federal policies are spatially uniform across regions. I study the unintended consequences of the uniformity of the national conforming loan limit (CLL) before 2008 on local jumbo mortgage lending. When the national CLL increased, the jumbo share of residential mortgages in low-income counties was significantly reduced relative to high-income counties. I find that banks responded to the national shock by significantly raising jumbo approval rates in low-income counties, consistent with the competition mechanism in which lenders expand jumbo credit to defend market share. The economic magnitude is significant: a county with a $10,000 lower median income is associated with, on average, a 6 percentage-point (or 11.77%) higher jumbo approval rate. The results are not driven by lender-specific changes, borrower quality changes, home price anticipation, or the demand channel. I find that banks in low-income counties lower jumbo mortgage rates and later suffer from worse mortgage performance. Furthermore, smaller and less informed banks expand jumbo credit more aggressively, and riskier borrowers receive more credit. Overall, my results highlight the negative consequences of the uniformity of federal policy in mortgage markets by showing how it can lead to distorted bank lending and reduce the efficiency of capital allocation across regions.

Introduction:

Teng Zhang is a Ph.D. candidate in Finance at Georgia Institute of Technology working on the dissertation under the direction of Professor Cheol Eun. His main research interests are corporate finance, corporate governance, and international finance.

//sites.google.com/site/tengtimzhang/

Your participation is warmly welcomed!