The Political Economy of Mortgage Lending

We show that banks expand mortgage lending in the home states of the Senate Banking Committee chairs, and the effect is more pronounced when the senators’ same-party House representatives are facing tight re-election races. Banks suffer worse mortgage asset quality but their overall profitability increases after favoring the politicians’ constituents. Banks strategically target politically active borrowers when expanding mortgage lending in the home states of Banking Committee chairs. Our findings suggest that political influences can distort capital allocation in the private sector beyond conventional political contribution channels.