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Mortgage credit volumes and monetary policy after the Great Recession

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  • Leu, Shawn C.-Y.
  • Robertson, Mari L.

Abstract

We study how the Federal Reserve's normalization plan influences interconnected mortgage credit markets that bridge the traditional and shadow banking sectors. Over key time periods (2006, 2009, 2015) in a time-varying factor-augmented vector autoregression with stochastic volatility, we document that increases in the shadow policy rate used to proxy the normalization plan lead to falls in bank mortgages partially offset by rises in nonbank mortgages. Monetary policy changes affect funding opportunities in securitized mortgage markets, lenders' willingness to lend, and economic conditions impacting mortgage demand that determine lenders' financial condition and numbers of mortgages extended. Banks, hampered by regulations, internalize a monetary policy contraction into fewer mortgages. Nonbanks take advantage and continue to meet mortgage demand through funding in agency securitized mortgages markets. Our findings suggest that the unintended increase in nonbank mortgages may threaten financial stability from more highly leveraged nonbanks becoming more vulnerable to adverse shocks.

Suggested Citation

  • Leu, Shawn C.-Y. & Robertson, Mari L., 2021. "Mortgage credit volumes and monetary policy after the Great Recession," Economic Modelling, Elsevier, vol. 94(C), pages 483-500.
    • Handle: RePEc:eee:ecmode:v:94:y:2021:i:c:p:483-500
    DOI: 10.1016/j.econmod.2020.09.011
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    3. Bayeh, Antonio & Bitar, Mohammad & Burlacu, Radu & Walker, Thomas, 2021. "Competition, securitization, and efficiency in US banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 80(C), pages 553-576.

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    More about this item

    Keywords

    Monetary policy; Mortgage lending; GSEs; Securitized mortgages; Great Recession; TVP-FAVAR-SV; Shadow policy rate;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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