Banks that are active in strong housing markets increase mortgage lending and decrease commercial lending. Firms that borrow from these banks have significantly lower investment. This is especially pronounced for firms that are more capital constrained or borrow from more-constrained banks.
Interpretation that commercial loans were crowded out by banks responding to profitable opportunities in mortgage lending, rather than with a demand-based interpretation. The results suggest that housing prices appreciations have negative spillovers to the real economy, which were overlooked thus far.
Our empirical analysis hinges on the differences across banks in their exposure to the real estate market. We use the location of banks’ deposit branches to proxy for the location of mortgage activity, since banks are more likely to do mortgage lending if there is larger price appreciation in the areas where they have branches. We then compare the behavior of banks that are more exposed with that of banks that are less exposed to housing price booms, and explore the implications for firms related to them.
The U.S. Federal Reserve purchased both agency mortgage-backed securities (MBS) and Treasury securities to conduct quantitative easing (QE). Using micro-level data, we find that banks benefiting from MBS purchases increase mortgage origination, compared to other banks. At the same time, these banks reduce commercial lending and firms that borrow from these banks decrease investment. The effect of Treasury purchases is different: either positive or insignificant in most cases. Our results suggest that MBS purchases caused unintended real effects and that Treasury purchases did not cause a large positive stimulus to the economy through the bank lending channel.
The Federal Reserve chose to implement the MBS purchases through the to-be-announced (TBA) market. In this market, the main parameters of the contract (coupon, maturity, issuer, settlement date, face value, and price) are agreed upon in advance. However, the exact pool of mortgages satisfying these terms is determined at settlement, which is typically one to three months in the future. As the TBA market primarily focuses on new mortgages, banks have a strong incentive to originate and securitize mortgages to fulfill these contracts. Existing legacy MBS or mortgage holdings on the banks’ balance sheet will not be a candidate for selling to the Federal Reserve via these asset purchases