Credit Supply, Prices, and Non-price Mechanisms in the Mortgage Market

I use an episode of relatively tight credit supply in the jumbo mortgage market to quantify the importance of price and non-price credit supply mechanisms in explaining changes in borrowing. Following market disruptions in March 2020, borrowers with jumbo loans saw significantly tighter credit supply conditions relative to borrowers with conforming loans. As a result, jumbo borrowers were 50 percent less likely to refinance and when they refinanced they borrowed 4-6 percent less than counterfactual borrowers facing looser credit conditions. The reduction in borrowing may have been caused by both an increase in the price and a change in a non-price mechanism, a decline in the availability of cash-out refinances. Decomposing the total effect into a price and cash-out channel, I find that that the cash-out channel accounts for two to three times as much of the decline as the price effect, and together both explain 70-80 percent of the total decline. This suggests that non-price mechanisms can be least as important as prices in clearing credit markets, a fact which is not adequately explained by current models of credit markets.