Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation

52 Pages Posted: 23 Feb 2017 Last revised: 5 Aug 2018

See all articles by Pedro Gete

Pedro Gete

IE Business School; IE University

Michael Reher

Harvard University

Date Written: July 2018

Abstract

We show that liquidity in secondary mortgage markets affects the composition of lenders and credit risk in the primary mortgage market. Using exogenous changes in MBS liquidity associated with the U.S. liquidity coverage ratio (LCR), we find that greater liquidity increased the market share and risk taking of nonbanks and originate-to-sell lenders. This effect is driven by the FHA market because LCR risk weights disproportionately raised MBS liquidity for FHA loans. Greater MBS liquidity increased credit supply for risky borrowers and led to higher homeownership rates. LCR can explain 26% of nonbanks' growth in market share from 2013-2015.

Keywords: Lending Standards, LCR, Liquidity, Mortgages, Nonbanks, FHA, GSEs, MBS

JEL Classification: G12, G18, G21, G23, E32, E44

Suggested Citation

Gete, Pedro and Reher, Michael, Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation (July 2018). Available at SSRN: https://ssrn.com/abstract=2921691 or http://dx.doi.org/10.2139/ssrn.2921691

Pedro Gete (Contact Author)

IE Business School

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

IE University ( email )

Calle Pedro de Valdivia 21
Madrid, Madrid 28006
Spain

Michael Reher

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
244
rank
121,668
Abstract Views
1,368
PlumX Metrics