How Monetary Policy Shaped the Housing Boom

Philipp Schnabl and Alexi Savov

No 14252, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 heterogeneity in banks' exposures to the deposits channel of monetary policy, we show that Fed tightening induced a large reduction in banks' deposit funding, leading them to contract new on-balance-sheet lending for home purchases by 26%. However, an unprecedented expansion in privately-securitized loans, led by nonbanks, largely offset this contraction. Since privately-securitized loans are neither GSE-insured nor deposit-funded, they are run-prone, which made the mortgage market fragile. Consistent with our theory, the re-emergence of privately-securitized mortgages has closely tracked the recent increase in rates.

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: 2019-12
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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