51 Pages Posted: 23 Feb 2017 Last revised: 5 Oct 2017
Date Written: September 2017
We exploit differential regulatory treatment across agency mortgage backed securities (MBS) under the U.S. liquidity coverage ratio (LCR) to study: 1) The market price of regulatory weight; 2) Spillovers of liquidity regulation in the primary mortgage market. We find that the regulatory premium for a security with 100% LCR weight is 54bp. LCR raised the MBS premium of Ginnie Mae (GNMA) by 10% compared to the GSEs. This premium, through an equilibrium channel, attracted nonbanks and originate-to-sell lenders towards the GNMA loan market. It also led to increased credit supply for risky borrowers. LCR explains 26% of nonbanks' rise from 2013-2015.
Keywords: Lending Standards, LCR, Liquidity, Mortgages, Nonbanks, FHA, GSEs, MBS
JEL Classification: G12, G18, G21, G23, E32, E44
Suggested Citation: Suggested Citation
Gete, Pedro and Reher, Michael, Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation (September 2017). Available at SSRN: https://ssrn.com/abstract=2921691