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Algorithms as Shadow Regulation: Secondary Market Access Overrides Home Buyer Credit Risk

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Abstract

Using confidential HMDA data on 30 million purchase applications, we show how automated underwriting distorts credit allocation. We document a severe 7.5-percentage point jump in denials at the 50% debt-to-income threshold. This "cliff" is unique to Fannie Mae’s software, whereas Freddie Mac’s algorithm exhibits no matching friction. By exploiting institutional routing to isolate secondary market access as the causal mechanism, we find a stark price-quantity asymmetry: the interest rate penalty is a mere 3 basis points, yet the threshold suppresses $7.7 billion in conventional originations annually, diverting 40,000 households into higher-cost financing.

Suggested Citation

  • Manu García & Carlos Garriga, 2026. "Algorithms as Shadow Regulation: Secondary Market Access Overrides Home Buyer Credit Risk," Working Papers 2026-011, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:103329
    DOI: 10.20955/wp.2026.011
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • L86 - Industrial Organization - - Industry Studies: Services - - - Information and Internet Services; Computer Software

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