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The Impact of the 2007 Liquidity Shock on Bank Jumbo Mortgage Lending

Authors

  • PAUL CALEM,

  • FRANCISCO COVAS,

  • JASON WU


  • We thank Elena Loutskina, John Driscoll, Ran Duchin, Atif Mian, Darius Palia, and participants at the Regulation of Systemic Risk Conference, the editors, and two anonymous referees for helpful comments. Aaron Game and Thomas Spiller provided excellent research assistance merging the Call Report data. Any remaining errors are our own. The views expressed are those of the authors and do not necessarily represent those of the Federal Reserve System or the Board of Governors.

Abstract

This paper explores the consequences of the collapse of the private-label residential mortgage-backed securities market in 2007 on banks’ originations of jumbo mortgages. We show that jumbo lending declined by more at banks that were more dependent on this market and were less well capitalized. In contrast, banks that had little dependence on this market and were well capitalized increased jumbo originations. These findings highlight how dependence on the secondary market may cause amplification of financial shocks, and the potential value of capital requirements that are higher during periods of economic growth in mitigating the amplification effects.

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