Non-Banks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation

28 Pages Posted: 23 Feb 2017 Last revised: 5 Apr 2017

Pedro Gete

Georgetown University; IE Business School

Michael Reher

Harvard University

Date Written: April 2017

Abstract

The 2014 U.S. liquidity coverage ratio (LCR) gave preferential liquidity weights to mortgage-backed securities (MBS) backed by GNMA versus those backed by the Government Sponsored Entreprises (GSEs). We show that this policy created a liquidity premium for GNMA-backed MBS relative to GSE-backed MBS. Then, exploiting cross-sectional differences in funding sources across lenders, we show that LCR policy has led to a higher market share for nonbanks and lenders reliant on securitization. It also led to increased supply of credit for risky borrowers and to tighter standards among loans eligible for purchase by the GSEs.

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, Non-Banks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation (April 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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