Akos Horvath and Benjamin S. KayBuilding on queuing theory, we develop and empirically validate a novel theoretical model of residential mortgage supply. Our model gives insight into how the stochastic arrival and sequential servicing of loan applications affect mortgage origination. The model provides closed-form predictions for lenders’ optimal response to changes in the level and price elasticity of mortgage demand. Using confidential HMDA data, we estimate that a one standard deviation increase in mortgage demand raises mortgage rate spreads by 3 to 8 basis points, loan quantities by 20 to 32 percent, and application processing times by 3 to 5 days. We also provide empirical evidence for the model prediction that a higher elasticity of mortgage demand moderates price increases due to demand shocks, which can limit lenders’ exploitation of their market power.
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