Regional Redistribution Through the U.S. Mortgage Market

Regional shocks are an important feature of the U.S. economy. Households’ ability to self-insure against these shocks depends on how they affect local interest rates. In the U.S., most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSEs). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates which vary with local risk, and we postulate that the lack of regional variation in GSE mortgage rates is likely driven by political pressure. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions.