Low-cost deposits and increased balance sheet liquidity raise banks' supply of illiquid loans more than loans easily sold or securitized. We exploit the inability of Fannie Mae and Freddie Mac to purchase jumbo mortgages to identify an exogenous change in liquidity. The volume of jumbo mortgage originations relative to nonjumbo originations increases with bank holdings of liquid assets and decreases with bank deposit costs. This result suggests that the increasing depth of the mortgage secondary market fostered by securitization has reduced the effect of lender's financial condition on credit supply. Copyright (c) 2009 the American Finance Association.
We show that mortgage lenders that concentrate in a few markets invest in more information than diversified lenders. First, concentrated lenders focus on the jumbo-loan market, where returns to information production are highest. Second, they ration credit less and retain more mortgages than diversified lenders. Third, they have higher profits than diversified lenders, their profits vary less systematically, and their stock prices fell much less during the 2007-08 credit crisis. Both across markets and over time, the share of concentrated lending -that is, the share of informed lending -is negatively related to the recent housing price run-up. We therefore conclude that inadequate information production played a key role in the 2001-2008 real estate bubble and crash.
Using exogenous deposit windfalls from oil and natural gas shale discoveries, we demonstrate that bank branch networks help integrate U.S. lending markets. We find that banks exposed to shale booms increase their mortgage lending in non-boom counties by 0.93% per 1% increase in deposits. This effect is present only in markets where banks have branches and is strongest for mortgages that are hard to securitize. Our findings suggest that contracting frictions limit the ability of arm's length finance to integrate credit markets fully. Branch networks continue to play an important role in financial integration, despite the development of securitization markets.
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