How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

Abstract

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgagebacked securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

The COVID-19 shock and consumer credit: Evidence from credit card data

“…Our paper contributes to the literature on the economic effects of the COVID-19 crisis. Previous studies find that the pandemic strongly affected labor markets ( Bartik, Bertrand, Lin, Rothstein, Unrath, 2020 , Cajner, Crane, Decker, Hamins-Puertolas, Kurz, 2020 , Coibion, Gorodnichenko, Weber, 2020 , Forsythe, Kahn, Lange, Wiczer, 2020 ), household expectations ( Binder, 2020 , Coibion, Gorodnichenko, Weber, 2020 , Hanspal, Weber, Wohlfart, 2020 ), economic uncertainty ( Baker et al., 2020a ), bank lending ( Beck, Keil, 2022 , Chodorow-Reich, Darmouni, Luck, Plosser, 2022 ), mortgage lending ( Fuster et al., 2021 ), and overall economic activity ( Lewis, Mertens, Stock, 2020 , Ludvigson, Ma, Ng, 2020 ). We add to the literature on the effects of the COVID-19 shock on consumer spending and borrowing behavior.…”

“…Our paper provides several contributions. First, while other papers also estimate the effect of local case severity and NPI stringency on various economic outcomes ( Beck, Keil, 2022 , Fuster, Hizmo, Lambie-Hanson, Vickery, Willen, 2021 , Goolsbee, Syverson, 2020 ), the existing literature focuses on such effects at a single point in time or as the average effect over time. In contrast, our paper estimates the time-varying effects of local pandemic severity and NPI stringency at a high (weekly) frequency over the course of 2020 and examines how the relative importance of these two factors changed over time.…”