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Queuing, Service Time, and Price Dynamics in Residential Mortgage Lending

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Abstract

Building on queuing theory, we develop and empirically validate a novel theoretical model of residential mortgage supply. Our model gives insight into how the stochastic arrival and sequential servicing of loan applications affect mortgage origination. The model provides closedform predictions for lenders’ optimal response to changes in the level and price elasticity of mortgage demand. Using confidential HMDA data, we estimate that a one standard deviation increase in mortgage demand raises mortgage rate spreads by 3 to 8 basis points, loan quantities by 20 to 32 percent, and application processing times by 3 to 5 days. We also provide empirical evidence for the model prediction that a higher elasticity of mortgage demand moderates price increases due to demand shocks, which can limit lenders’ exploitation of their market power.

Suggested Citation

  • Akos Horvath & Benjamin S. Kay, 2026. "Queuing, Service Time, and Price Dynamics in Residential Mortgage Lending," Finance and Economics Discussion Series 2026-017, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:102999
    DOI: 10.17016/FEDS.2026.017
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    References listed on IDEAS

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    1. Menezes, Flavio M. & Quiggin, John, 2022. "Market power amplifies the price effects of demand shocks," Economics Letters, Elsevier, vol. 221(C).
    2. Neil Bhutta & Andreas Fuster & Aurel Hizmo, 2020. "Paying Too Much? Price Dispersion in the U.S. Mortgage Market," Finance and Economics Discussion Series 2020-062, Board of Governors of the Federal Reserve System (U.S.).
    3. Anne Gron, 1994. "Capacity Constraints and Cycles in Property-Casualty Insurance Markets," RAND Journal of Economics, The RAND Corporation, vol. 25(1), pages 110-127, Spring.
    4. Neil Bhutta & Andreas Fuster & Aurel Hizmo, 2026. "Paying Too Much? Borrower Sophistication and Overpayment in the U.S. Mortgage Market," Journal of Finance, American Finance Association, vol. 81(1), pages 49-90, February.
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    Keywords

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    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms

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