Mortgage Securitization and Shadow Bank Lending
52 Pages Posted: 23 Feb 2017 Last revised: 3 Jul 2019
Date Written: July 2019
We document a new channel through which securitization affects financial stability: higher prices in the secondary market increase the supply of credit in the primary market by lenders with little funding liquidity, especially nonbanks. We estimate the effect by exploiting a regulatory shock to the cross-section of mortgage-backed security prices, the introduction of the U.S. Liquidity Coverage Ratio. The shock increases secondary market prices for particular loan types (i.e. FHA loans) by granting them favorable regulatory status as a securitized product. Nonbanks respond by loosening standards for such loans, which raises their market share and also increases homeownership.
Keywords: Lending Standards, LCR, Liquidity, Mortgages, Nonbanks, FHA, GSEs, MBS
JEL Classification: G12, G18, G21, G23, E32, E44
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