Working Paper: NBER ID: w25649
Authors: Itamar Drechsler; Alexi Savov; Philipp Schnabl
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; Housing Boom; Mortgage Lending; Privately Securitized Loans; Deposits Channel
JEL Codes: E43; E52; G21; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Fed tightening (E52) | reduction in banks' deposit funding (G21) |
| reduction in banks' deposit funding (G21) | contraction of new on-balance-sheet lending for home purchases (G21) |
| Fed tightening (E52) | expansion in privately securitized loans (G21) |
| expansion in privately securitized loans (G21) | offset contraction in bank portfolio lending (G21) |
| Fed tightening (E52) | total non-GSE mortgage lending decline (G21) |