Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation
52 Pages Posted: 23 Feb 2017 Last revised: 5 Aug 2018
Date Written: July 2018
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: Suggested Citation