How Monetary Policy Shaped the Housing Boom

68 Pages Posted: 8 Mar 2019 Last revised: 30 Apr 2021

See all articles by Itamar Drechsler

Itamar Drechsler

Wharton School, Department of Finance; National Bureau of Economic Research (NBER)

Alexi Savov

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)

Philipp Schnabl

New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: January 15, 2019

Abstract

Between 2003 and 2006, the Federal Reserve raised rates by 4.25%. Yet it was precisely during this period that the housing boom accelerated, fueled by rapid growth in mortgage lending. There is deep disagreement about how, or even if, monetary policy impacted the boom. Using differences in exposure to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, which led banks to contract portfolio mortgage lending by 32%. However, this contraction was largely offset by substitution to privately-securitized (PLS) mortgages, led by nonbank originators. Fed tightening thus induced a shift in mortgage lending away from stable, insured deposit funding toward run-prone and fragile capital markets funding with little impact on overall lending. We find similar results during the most recent tightening cycle over 2014--2017 when PLS lending reemerged.

Keywords: Monetary Policy, Mortgage Lending, Banks, Securitization, Deposits, Private-Label Securitization

JEL Classification: E52, E43, G21, G31

Suggested Citation

Drechsler, Itamar and Savov, Alexi and Schnabl, Philipp, How Monetary Policy Shaped the Housing Boom (January 15, 2019). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3337127 or http://dx.doi.org/10.2139/ssrn.3337127

Itamar Drechsler

Wharton School, Department of Finance ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

HOME PAGE: http://https://sites.google.com/site/idrechsl/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Alexi Savov

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Philipp Schnabl (Contact Author)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/pschnabl/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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