Are Uniform Pricing Policies Unfair? Mortgage Rates, Credit Rationing, and Regional Inequality

Federal policy often institutes uniform pricing across regions in the name of fairness. I study the unintended consequences of such uniform pricing in the context of the residential mortgage market, which is heavily influenced by the securitization policies of the government sponsored enterprises (GSEs). I show that the regional uniformity of GSE-conforming mortgage rates leads to credit rationing. I develop three results by exploiting differences in the strength of lender rights — state laws that limit a lender’s recourse and ability to foreclose on property — as a source of regional variation. First, controlling for borrower characteristics, I find that GSE-securitized mortgage rates do not vary across lender rights whereas those of privately securitized mortgages do vary. Second, the lack of regional variation in mortgage rates leads to the credit rationing of marginal borrowers in regions with borrower-friendly laws, whereas, regression discontinuity and bunching estimates show that the GSEs “cherry-pick” the better risks leading to greater credit access in lender-friendly areas. Finally, I find that the GSEs’ cost of funds advantage distorts the pool of borrowers available to the private market and that only some of the GSE-rationed borrowers can access privately securitized mortgages. Overall, the results demonstrate how uniform regional pricing and cost of funds advantages of the GSEs distorts the competitive landscape of the US mortgage market.