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A residential mortgage bank lending channel during the financial crisis

Author

Listed:
  • Salman Tahsin

    (Park University)

  • Timothy J. Yeager

    (University of Arkansas)

Abstract

We estimate a residential mortgage bank lending channel effect on a cross-section of county-level housing markets between 2007 and 2009. The effect results primarily from distressed banks denying credit to otherwise creditworthy jumbo loan applicants. Traditional measures of bank distress are plagued with concerns about endogeneity and spurious correlation. Our innovation is to use the county-aggregated change in the jumbo to nonjumbo mortgage acceptance rate first explored by Loutskina and Strahan (2009) as an instrumental variable for bank distress. We find a statistically significant but economically small bank lending channel effect. A county with a one standard deviation decline in the instrumental variable experiences an additional 89 basis point decline in home prices and a 1.25% decrease in construction employment, which represent 7 and 6%, respectively, of their mean changes between 2007 and 2009. Most of the decline in the housing market results from the bust of the pre-crisis housing boom driven by aggressive subprime and jumbo lending.

Suggested Citation

  • Salman Tahsin & Timothy J. Yeager, 2019. "A residential mortgage bank lending channel during the financial crisis," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(4), pages 631-656, October.
    • Handle: RePEc:spr:jecfin:v:43:y:2019:i:4:d:10.1007_s12197-018-9457-7
    DOI: 10.1007/s12197-018-9457-7
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    Cited by:

    1. Li, Yongjia & Tahsin, Salman, 2021. "Home price appreciation and residential lending standards," Journal of Economics and Business, Elsevier, vol. 114(C).
    2. Tahsin, Salman, 2022. "Home price growth and minority access to mortgage credit," Journal of Economics and Business, Elsevier, vol. 120(C).

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    More about this item

    Keywords

    Bank lending channel; HMDA; Mortgages; Bank distress; Jumbo loans; Subprime lending; Housing; Employment;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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