An empirical test of credit rationing in the mortgage market

John V. Duca, Stuart S. Rosenthal

Research output: Contribution to journalArticlepeer-review

28 Scopus citations


Recent theoretical models of credit rationing suggest that mortgages are rationed with nonprice terms on the basis of default risk despite the development of secondary mortgage markets and the deregulation of deposit rates. We test this hypothesis using aggregate time series data on FHA and conventional mortgage originations. FHA loans are more expensive for borrowers but provide federal guarantees which protect lenders against default losses. For this reason, FHA loans should be subject to easier credit constraints than conventional mortgages, and the FHA share of mortgage originations should increase with aggregate default risk. Default risk is proxied by a bond rate quality spread consistent with previous studies. Our results imply that default risk-induced mortgage rationing persists in the post disintermediation era, but that FHA programs help offset the overall impact of rationing on housing markets.

Original languageEnglish (US)
Pages (from-to)218-234
Number of pages17
JournalJournal of Urban Economics
Issue number2
StatePublished - Mar 1991
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies


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