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

52 Pages Posted: 23 Feb 2017 Last revised: 29 Nov 2017

Pedro Gete

Georgetown University; Fundación Instituto de Empresa, S.L. - IE Business School

Michael Reher

Harvard University

Date Written: November 2017

Abstract

We study how variation in MBS premia generated by the U.S. liquidity coverage ratio (LCR) affects the composition of lenders and credit risk in the primary mortgage market. We find that LCR raised MBS spreads 2.5bp for every 10% increase in a given security's regulatory weight. This premium, through a general equilibrium channel, attracted nonbanks and originate-to-sell lenders towards the FHA market. It also led to increased credit supply for risky borrowers. 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

Gete, Pedro and Reher, Michael, Nonbanks and Lending Standards in Mortgage Markets. The Spillovers from Liquidity Regulation (November 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/

Fundación Instituto de Empresa, S.L. - 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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