Abstract: Spain experienced a boom in residential mortgage debt followed by a sudden bust in the late 2000s. We employ a within-region analysis using administrative mortgage data aggregated at municipality level to investigate the origin of the mortgage debt boom. By using the BNP securitization shock (August 2007), we provide evidence of a supply-driven credit boom. When BNP ceased activity in three hedge funds related to U.S. subprime mortgages, securitization activity in international markets froze. Spanish banks intensively used securitization of real-estate assets as source of liquidity and, thus, it represented a severe negative credit supply shock. We show that, during the boom (pre-BNP), mortgage debt increased relatively more in low-education (high credit risk) municipalities. After the securitization shock, the economy, driven by low-education municipalities, was still growing. However, banks immediately changed their lending policies and mortgage debt fell relatively more in these municipalities. Lastly, we document that there were no signicant dierences in both the average and the distribution of loan-to-value (LTV) of mortgages in high- and low-education municipalities. During the boom, the average LTV was stable around 0.7 with less than 20% of mortgages above 0.8. During the recession, low-education municipalities had more foreclosures, which indicates that ex-ante risk was not well captured by LTV ratios. A policy implication of the results is that financial regulations focused on LTV may lead to myopic macroprudential policies.

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