Mortgage Securitization and Shadow Bank Lending

Abstract

We show how securitization affects the size of the nonbank lending sector through a novel price-based channel. We identify the channel using a regulatory spillover shock to the cross-section of mortgage-backed security prices: the U.S. liquidity coverage ratio. The shock increases secondary market prices for FHA-insured loans by granting them favorable regulatory status once securitized. Higher prices lower nonbanks’ funding costs, prompting them to loosen lending standards and originate more FHA-insured loans. This channel accounts for 22% of nonbanks’ growth in overall mortgage market share over 2013--2015. While the shock creates risks for financial stability, homeownership also increases.

Intermediation Frictions in Debt Relief: Evidence from CARES Act Forbearance

“…Finally, our results shed light on the behaviour of nonbank mortgage companies (for other contributions see Buchak et al, 2020;Gete and Reher, 2020;Jiang et al, 2020;Buchak et al, 2018) and large banks (see e.g., Huber, 2021). We also contribute to a broader literature studying how financial constraints, size, and organizational frictions affect product quality and firm outcomes (e.g., Matsa, 2011;Kugler and Verhoogen, 2011;Rose, 1990).…”

Nonbanks and Mortgage Securitization

“…Nonbanks can be more nimble than banks in entering new markets, adapting to changing market conditions, and adopting new technologies. Gete & Reher (2021) find that the increased nonbank market share may be welfare improving due to increased access to homeownership. Nonbanks may also have played a role in maintaining access to credit after the GFC.…”

Mortgage-Backed Securities

“…As evidence on this point, Loutskina and Strahan (2009) show that bank liquid assets and deposit costs play much less of a role in the origination of conforming mortgages, which can easily be securitized, compared to less-liquid jumbo mortgages. Securitization is also fundamental to the rise of nonbank lenders (financed through wholesale funding) as the dominant origination channel in the US (Buchak et al, 2020;Gete and Reher, 2020;Kim et al, 2022). 29 Since securitization increases liquidity and broadens the set of lenders able to originate mortgages, one would naturally expect that it also leads to an outward shift in credit supply, plausibly increasing credit access for otherwise "marginal" borrowers.…”