The Impact of Balance Sheet Lending versus Securitization Booms on the Severity of the Great Recession
40 Pages Posted: 9 Dec 2020
Date Written: November 10, 2020
Abstract
I separately estimate the effect of local credit booms driven by balance sheet lending and those driven by securitization during the 2002-2006 period on the severity of the 2007-2009 recession in the United States. I construct a novel dataset, linking publicly available data on residential mortgage originations from the Home Mortgage Disclosure Act together with bank financial statements and county level economic outcomes. I exploit geographic variation in bank origination activity across counties to construct county level measures of exposure to securitization and balance sheet lending activity during the 2002-2006 period that are orthogonal to local economic conditions. Results show that 2002-2006 securitization exposure is predictive of sharper declines in home prices, employment, and a rise in mortgage delinquencies during the subsequent crisis period. The same is not true for balance sheet lending, which does not affect crisis period home prices and generates a drop in employment that is confined to the nontradable sector. Results suggest that this difference is driven by risk taking that is specific to securitized lending. Balance sheet booms generate an expansion in lending to higher quality borrowers, while securitization booms increase credit availability at the lower end of the credit distribution.
Keywords: mortgage backed securities, securitization, balance sheet lending, portfolio lending, credit booms, boom-bust cycle, great recession
JEL Classification: E24, E32, E44, G01, G20
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