Lenders’ pricing strategy : Do neighborhood risks matter?

Sumit AGARWAL, Yongheng DENG, Jia HE, Yonglin WANG, Qi ZHANG*

*Corresponding author for this work

Research output: Journal PublicationsJournal Article (refereed)peer-review


This article explores the different pricing strategies of lenders who originate both government-sponsored enterprise (GSE) and non-GSE loans. We find that conditional on loan and borrower characteristics and some observable local economic factors, mortgage rates on GSE loans vary significantly across regions. However, we observe no sizable regional variation in loan amounts or default risk. By contrast, the mortgage rates on non-GSE loans depend almost entirely on borrowers and loan characteristics. In addition, we find that spatial variations in GSE mortgage rates are highly responsive to regional prepayment risk. Our results are robust to various controls for neighborhood characteristics, including regional-level bank competition, borrower accessibility to mortgages, and household income levels. Overall, the findings offer a novel insight into how lenders adjust pricing strategies in response to a changing lending environment. The results provide implications relating to the present and imminent dangers of housing bubbles and the intensified refinancing wave following the COVID-19 pandemic.

Original languageEnglish
Pages (from-to)1011-1047
Number of pages37
JournalReal Estate Economics
Issue number4
Early online date13 Dec 2022
Publication statusPublished - Jul 2023

Bibliographical note

Funding Information:
The authors would like to thank the editor, Dr. Daniel McMillen, and two anonymous referees for their valuable comments and suggestions. We would also like to acknowledge the research assistance of Congyan Han, a PhD student at UW‐Madison. Jia He thanks the National Natural Science Foundation of China for financial support (No. 72271130 and No. 71901128). Yonglin Wang thanks the Public Policy Research Funding Scheme funded by PICO, The Government of Hong Kong SAR (Grant No. 2020.A3.025.20C) and General Research Fund funded by Hong Kong RGC (Grant No. 13605120) for their financial support.

Publisher Copyright:
© 2022 American Real Estate and Urban Economics Association.


  • loan pricing
  • mortgage securitization
  • neighborhood effect
  • prepayment risk
  • refinancing waves

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