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

51 Pages Posted: 23 Feb 2017 Last revised: 5 Oct 2017

Pedro Gete

Georgetown University; IE Business School

Michael Reher

Harvard University

Date Written: September 2017

Abstract

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

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

Pedro Gete (Contact Author)

Georgetown University ( email )

ICC 580
37th and O Sts., NW
Washington, DC 20057
United States

HOME PAGE: http://www9.georgetown.edu/faculty/pg252/

IE Business School

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

Michael Reher

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

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