Mortgage Lending Determinants in a Major Metropolitan Area

Abstract

The purpose of this paper is twofold. First, the paper analyzes the determinants of mortgage lending terms at a commercial bank and at a mutual savings bank in a major metropolitan area. Secondly, the paper addresses the question whether the clientele of the institutions differ with respect to the mortgage applications. The data set consists of observations on mortgage lending terms and borrower and property characteristics for mortgage loan applications from each of the financial institutions. The survey was conducted from January 1978 to June 1978. The coefficients from the estimated equations are tested for statistical significance. The estimated equations include the following variables. The loan terms are amount requested, percentage down payment, years to maturity, and interest rate. Although it is recognized that those terms may be interdependent, that particular problem is not considered here. Indeed, interdependence of loan terms exists given that the market for mortgages is not cleared solely by the movement of interest rates. That is due either to the inflexibility of mortgage rates because of political constraints such as usury ceilings or the willingness of the applicant and institution to trade off among the various terms. 1 In particular, a lower interest rate may be offered the applicant provided a higher down payment is forthcoming. Thus, to clear the market for mortgages, the rationing of credit is accomplished through an interaction of the entire package of loan terms rather than simply via movements in the mortgage interest rate. Moreover, in the case of mortgage applications, the determination of the willingness of the financial institution to grant the application will depend on the creditworthiness of the borrower. The functions used in this paper include as measures of creditworthiness ratio of monthly hous