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The Residential Mortgage Supply Function of Commercial Banks

Department of Finance, Insurance and Real Estate, Washington State University, POB 644746, Pullman, WA 99164, USA, depley{at}wsu.edu

Kartono Liano

Department of Finance and Economics, Mississippi State University, P.O. Box 9580, Mississippi State, MS 39762-9580, USA, kliano{at}cobilan.msstate.edu

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.

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