DO MORTGAGE RATES VARY BASED ON HOUSEHOLD DEFAULT CHARACTERISTICS - EVIDENCE ON RATE SORTING AND CREDIT RATIONING

Credit ''screening models'' suggest that lenders vary loan rates and d ebt ceilings across applicants on the basis of credit risk. We argue t hat regulatory constraints such as Fair Lending Laws may preclude rate sorting while increasing lender use of debt ceilings to adjust for ap plicant credit risk. Using household data from the 1983 SCF, we find t hat mortgage rates do not vary with applicant credit risk whereas rela ted studies find that debt ceilings vary with borrower risk attributes . Together, these findings support arguments that regulatory constrain ts reduce rate sorting while increasing the use of non-price terms in the mortgage contract.