DP7633 Risk Heterogeneity and Credit Supply: Evidence from the Mortgage Market

Author(s): Timothy J. Besley, Neil Meads, Paolo Surico
Publication Date: January 2010
Keyword(s): credit supply, heterogeneous effects, instrumental variable., mortgage individual data, risk pricing
JEL(s): D10, E21, G21
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=7633

This paper uses a unique data set on more than 600,000 mortgage contracts to estimate a credit supply function which allows for risk-heterogeneity. Non-linearity is modeled using quantile regressions. We propose an instrumental variable approach in which changes in the tax treatment of housing transactions are used as an instrument for loan demand. The results are suggestive of considerable risk heterogeneity with riskier borrowers penalized more for borrowing more.