Liquidity Crises in the Mortgage Market

Abstract

Nonbanks originated about half of all mortgages in 2016, and 75% of mortgages insured by the FHA or VA. Both shares are much higher than those observed at any point in the 2000s. We describe in this paper how nonbank mortgage companies are vulnerable to liquidity pressures in both their loan origination and servicing activities, and we document that this sector in aggregate appears to have minimal resources to bring to bear in a stress scenario. We show how these exact same liquidity issues unfolded during the financial crisis, leading to the failure of many nonbank companies, requests for government assistance, and harm to consumers. The extremely high share of nonbank lenders in FHA and VA lending suggests that nonbank failures could be quite costly to the government, but this issue has received very little attention in the housing-reform debate.

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

“…The evidence in this paper adds to a large body of research about the transmission of monetary policy and interest rate shocks through the mortgage market and the role of financial frictions, including Berger et al (2020), Di Maggio et al (2017, Fuster et al (2013), ; see Amromin et al (2020) for a recent review. Our results are also related to research on the growing presence of nonbank mortgage intermediaries, which now originate more than half of new loans and are more sensitive to liquidity risk (Kim et al, 2018;Jiang et al, 2020;Buchak et al, 2018).…”

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“…46 Kim et al (2018b) provide evidence that nonbank lenders in the mortgage market rely on "warehouse lines of credit" to fund their lending activity. Likewise, nonbanks in the syndicated loan market often rely on similar lines of credit.…”