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

Anthony W. Orlando and Gerd Welke

Journal of Banking & Finance, 2025, vol. 176, issue C

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 the transmission mechanism primarily at the intensive margins, as the higher conforming loan limit leads to larger individual loans and therefore 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.

Keywords: Mortgage loans; Housing finance; Credit supply; Housing prices (search for similar items in EconPapers)
JEL-codes: G12 G21 G23 G28 G51 R38 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:176:y:2025:i:c:s0378426625000585

DOI: 10.1016/j.jbankfin.2025.107438

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