Description
Abstract: From 2000-2006 U.S. house prices and mortgage credit grew while the relative cost of mortgage credit fell – particularly for privately securitized mortgages – suggesting a credit supply expansion. This paper compares innovations in the securitization of mortgage credit (a credit supply shock) to other candidate credit supply shocks. I model a two-layered mortgage market. This generates a novel balance sheet effect: changes in aggregate mortgage credit quantity are linked to changes in mortgage spreads via the interaction of financially constrained commercial banks and mortgage securitizers. Innovation in securitization (a direct relaxation of the securitizers' financial constraint) matches mortgage market dynamics.