How monetary policy shaped the housing boom

Itamar Drechsler, Alexi Savov and Philipp Schnabl

Journal of Financial Economics, 2022, vol. 144, issue 3, 992-1021

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 (search for similar items in EconPapers)
JEL-codes: E43 E52 G21 G31 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:3:p:992-1021

DOI: 10.1016/j.jfineco.2021.06.039

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