The Residential Mortgage Supply Function of Commercial Banks

Abstract

The paper develops a residential supply function for approved fixed-rate mortgages in US commercial banks as a first step to explain differences in origination patterns among groups of borrowers. It models the lender's decision to offer the borrower a risk-adjusted loan bundle relative to the terms on the credit application. The model includes multiple dependent variables that are risk-adjusted simultaneously to reflect accurately the loan officer's decision. Canonical correlation factor analysis is used to capture the lender's simultaneous decision. The loan-price ratio and contract interest rate are the most important variables in the lender supply function.