Credit s upply a nd t he h ousing b oom Alejandro Jus5niano Giorgio Primiceri Federal Reserve Bank of Chicago Northwestern University Andrea Tambalo:
Federal Reserve Bank of New York 8th Bank of Portugal Conference on Monetary Economics
June 13, 2015 The'US'economy'in'the'2000s:'Four'stylized'facts'
Decline'in'mortgage'rates'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
1.'Real'mortgage'rates'
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Jus5niano,'Primiceri,'Tambalo:'
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Credit'supply'and'the'housing'boom'
The'US'economy'in'the'2000s:'Four'stylized'facts'
Decline'in'mortgage'rates'
Unprecedented'boomQbust'cycle'in'house'prices'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
2.'Real'house'price'
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Credit'supply'and'the'housing'boom'
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The'US'economy'in'the'2000s:'Four'stylized'facts'
Decline'in'mortgage'rates'
Unprecedented'boomQbust'cycle'in'house'prices'
Massive'HH'debt'accumula5on,'and'then'deleveraging'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
3.'Household'debt'
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Jus5niano,'Primiceri,'Tambalo:'
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Credit'supply'and'the'housing'boom'
4.'DebtQtoQcollateral'ra5o'
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Jus5niano,'Primiceri,'Tambalo:'
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Credit'supply'and'the'housing'boom'
The'US'economy'in'the'2000s:'Four'stylized'facts'
Decline'in'mortgage'rates'
Unprecedented'boomQbust'cycle'in'house'prices'
Massive'HH'debt'accumula5on,'and'then'deleveraging'
DebtQtoQcollateral'ra5o'constant,'and'then'spikes'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
This'paper'

Ques%on:'''What'is'the'fundamental'driver'behind'these'facts?'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
This'paper'

Ques%on:'''What'is'the'fundamental'driver'behind'these'facts?'

Approach:'''Model'of'HH'borrowing'as'laboratory'
  borrowing'constraints,'houses'as'collateral''
  lending'constraints'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Summary'of'the'results'

Ques%on:'''What'is'the'fundamental'driver'behind'these'facts?'

Answer:'''An'increase'in'credit'supply'brought'about'by'looser'
lending'constraints.'Consistent'with'
  decline'in'mortgage'rates'
  large'increase'in'house'prices'
  constant'debtRtoRcollateral'ra5o'during'the'boom'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Summary'of'the'results'

Ques%on:'''What'is'the'fundamental'driver'behind'these'facts?'

Answer:'''An'increase'in'credit'supply'brought'about'by'looser'
lending'constraints.'Consistent'with'
  decline'in'mortgage'rates'
  large'increase'in'house'prices'
  constant'debtRtoRcollateral'ra5o'during'the'boom'

Looser'collateral'requirements'not'an'important'driving'force'of'
the'boom.'At'odds'with'the'behavior'of'
  mortgage'rates,'house'prices,'household'leverage'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Summary'of'the'results'

Ques%on:'''What'is'the'fundamental'driver'behind'these'facts?'

Answer:'''An'increase'in'credit'supply'brought'about'by'looser'
lending'constraints.'Consistent'with'
  decline'in'mortgage'rates'
  large'increase'in'house'prices'
  constant'debtRtoRcollateral'ra5o'during'the'boom'

Looser'collateral'requirements'not'an'important'driving'force'of'
the'boom.'At'odds'with'the'behavior'of'
  mortgage'rates,'house'prices,'household'leverage'

Excessive'loosening'of'collateral'requirements'can'explain'why'
house'prices'started'to'fall,'even'if'liberaliza5on'was'in'full'swing'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Some l iterature n
Importance of borrowing constraints in the boom-­‐bust of the 2000s Ø  Boom: Favilukis, Ludvigson, Van Nieuwerburgh (2013), Boz and Mendoza (2012), Garriga, Manuelli and Peralta-­‐Alva (2012), Midrigan and Philippon (2011) Ø  Bust: Guerrieri and Lorenzoni (2012), Eggertsson and Krugman (2012), Hall (2012) Ø  We concentrate on barriers to lending and their interac$on with collateral constraints, as in Landvoigt (2014) n
Constraints on composi$on of balance sheet of intermediaries Ø  Gertler and Kiyotaki (2010), Gerali et al. (2010), Adrian and Shin (2010), Adrian and Boyarchenko (2012 and 2013), He and Krishnamurty (2013), Dewachter and Wouters (2014), Brunnermeier and Sannikov (2014), etc… Ø  We concentrate on the link between the availability of credit, household debt and home price in the 2000s n
Micro-­‐econometric evidence Ø  Mian and Sufi (2009, 2011), Ambrose and Thibodeau (2004), Favara and Imbs(2012), Di Maggio and Kermani (2014) Jus$niano, Primiceri, Tambalo3 Credit supply and the housing boom Outline'

Model''

Parameteriza5on'

Quan5ta5ve'results'
  Expansion'in'credit'supply'
  Loosening'of'collateral'requirements'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Simplest'model'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Simplest'model'

Build'on''
  Kiyotaki'and'Moore'(1997)'
  Iacoviello'(2005)'
  Campbell'and'Hercowitz'(2006)'

2'groups'of'households''
  Pa5ent '
  Impa5ent'
''
''
'Lenders'
'Borrowers'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Simplest'model'

Build'on''
  Kiyotaki'and'Moore'(1997)'
  Iacoviello'(2005)'
  Campbell'and'Hercowitz'(2006)'

2'groups'of'households''
  Pa5ent '
  Impa5ent'
''
''
'Lenders'
'Borrowers'
''
''income'is'exogenous'

No'produc5on'

Fixed'supply'of'(new)'houses'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'problem'of'the'borrowers'
∞
[
]
max E 0 ∑ βbt u(c b,t ) + v ( hb,t )
t =0
c b,t + pt [ hb,t +1 − (1 − δ ) hb,t ] + Rt −1Db,t −1 ≤ y b,t + Db,t
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
€
The'problem'of'the'borrowers'
∞
[
]
max E 0 ∑ βbt u(c b,t ) + v ( hb,t )
t =0
c b,t + pt [ hb,t +1 − (1 − δ ) hb,t ] + Rt −1Db,t −1 ≤ y b,t + Db,t

Borrowing'is'limited'by'a'collateral1constraint1
Db,t ≤ θ pt hb,t +1
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
€
The'problem'of'the'borrowers'
∞
[
]
max E 0 ∑ βbt u(c b,t ) + v ( hb,t )
t =0
c b,t + pt [ hb,t +1 − (1 − δ ) hb,t ] + Rt −1Db,t −1 ≤ y b,t + Db,t

Borrowing'is'limited'by'a'collateral1constraint1
Db,t ≤ θ pt hb,t +1
  Associated'mul5plier:'μ"≥"0'
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'problem'of'the'lenders'''('β l '>'β b ')'
∞
[
]
max E 0 ∑ βlt u(c l,t ) + v ( hl,t )
t =0
c l,t + pt [ hl,t +1 − (1 − δ ) hl,t ] + Rt −1Dl,t −1 ≤ y l,t + Dl,t
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'problem'of'the'lenders'''('β l '>'β b ')'
∞
[
]
max E 0 ∑ βlt u(c l,t ) + v ( hl,t )
t =0
c l,t + pt [ hl,t +1 − (1 − δ ) hl,t ] + Rt −1Dl,t −1 ≤ y l,t + Dl,t

Mortgage'lending'is'limited'by'a'lending1constraint1
−Dl,t ≤ L
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'lending'constraint'
−Dl,t ≤ L


In'reduced'form,'captures'all'factors'hampering'the'free'flow'of'
funds'from'the'savers'to'mortgage'financing'
€
Implicit'or'explicit,'regulatory'and'technological'constraints'on'
mortgage'lending'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'lending'constraint'
−Dl,t ≤ L

In'reduced'form,'captures'all'factors'hampering'the'free'flow'of'
funds'from'the'savers'to'mortgage'financing'
€

Implicit'or'explicit,'regulatory'and'technological'constraints'on'
mortgage'lending'

Example:'MoneyQmarket'funds,'pension'funds'and'insurance'
companies'are'restricted'by'regula5ons'to'holding'only'the'safest'
securi5es'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'lending'constraint'
−Dl,t ≤ L

In'reduced'form,'captures'all'factors'hampering'the'free'flow'of'
funds'from'the'savers'to'mortgage'financing'
€

Implicit'or'explicit,'regulatory'and'technological'constraints'on'
mortgage'lending'

Example:'MoneyQmarket'funds,'pension'funds'and'insurance'
companies'are'restricted'by'regula5ons'to'holding'only'the'safest'
securi5es'

Can'be'interpreted'as'stemming'from'leverage'or'regulatoryQ
capital'requirement'of'financial'intermediaries'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'

Implica5ons'
  Borrowers'are'marginal'buyers'of'houses'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
βb u'(c b,t +1 )
h,c
pt =
mrs
[
b,t +1 + (1 − δ ) pt +1 ]
1 − µtθ u'(c b,t )

€
Implica5ons'
  Borrowers'are'marginal'buyers'of'houses'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
Linear'u5lity'in'consump5on'
βb u'(c b,t +1 )
h,c
pt =
mrs
[
b,t +1 + (1 − δ ) pt +1 ]
1 − µtθ u'(c b,t )

€
Implica5ons'
  Borrowers'are'marginal'buyers'of'houses'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
Linear'u5lity'in'consump5on'
βb
h,c
pt =
mrs
[
b,t +1 + (1 − δ ) pt +1 ]
1 − µtθ

Implica5ons'
€   Borrowers'are'marginal'buyers'of'houses'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
Linear'u5lity'in'consump5on'
βb
h,c
pt =
mrs
[
b,t +1 + (1 − δ ) pt +1 ]
1 − µtθ

Implica5ons'
€   Borrowers'are'marginal'buyers'of'houses'
  Varia5on'in'house'prices'only'due'to'varia5on'in'discoun5ng'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Two'addi5onal'simplifying'assump5ons'
'Rigid'demand'for'houses'by'the'
lenders'
Linear'u5lity'in'consump5on'
βb
h,c
pt =
mrs
[
b,t +1 + (1 − δ ) pt +1 ]
1 − µtθ

Implica5ons'
€   Borrowers'are'marginal'buyers'of'houses'
  Varia5on'in'house'prices'only'due'to'varia5on'in'discoun5ng'

When'collateral'constraint'binds'('μ">"0"),'''''θ'
Jus5niano,'Primiceri,'Tambalo:'

Credit'supply'and'the'housing'boom'
p'
Interac5on'of'borrowing'and'lending'constraints'

Borrowing'constraint:

Lending'constraint:'
'
'
−D'l,t ≤ L''''''''
''
Db,t ≤ θ pt hb,t +1
Db,t ≤ L
€
€
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Interac5on'of'borrowing'and'lending'constraints'

Borrowing'constraint:

Lending'constraint:'
'
'
−D'l,t ≤ L''''''''
''
Db,t ≤ θ pt hb,t +1
Db,t ≤ L
€
€
€

Which'constraint'binds'is''
  exogenous:'
L
and
θ
βb
mrs + (1 − δ ) pt +1 ]
[
  endogenous:''''''''pt =
1 − µtθ
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Standard'model'without'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
NonQbinding'lending'constraint'
- R = 1/βl
-  Collateral constraint binding (µ>0)
R
1/βb
βb
mrs + (1 − δ ) pt +1 ]
[
- pt =
1 − µtθ
Demand of funds
€
1/βl
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Binding'lending'constraint'
- R = 1/βb
-  Collateral constraint not binding
R
1/βb
-
pt = βb [ mrs + (1 − δ ) pt +1 ]
Demand of funds
€
1/βl
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
- R = 1/βl
-  Collateral constraint binding (µ>0)
R
1/βb
βb
mrs + (1 − δ ) pt +1 ]
[
- pt =
1 − µtθ
Demand of funds
€
1/βl
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Relaxing'the'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Outline'

Model''

Parameteriza5on'

Quan5ta5ve'results'
  Expansion'in'credit'supply'
  Loosening'of'collateral'requirements'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Parameter'values'

Calibrate'parameters'to'match'1990Q2000'

Micro'data:'Survey'of'Consumer'Finances'
  Triennial'detailed'survey'data'of'US'households’'balance'sheet'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Taking'the'model'to'the'data:'Challenges'
In'the'data,'many'HHs'have'both'mortgages'and'assets'
  Iden5fy'borrowers'as'agents'with'lille'liquid'financial'assets'in'SCF'
  Kaplan'and'Violante'(2012)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Taking'the'model'to'the'data:'Challenges'
In'the'data,'many'HHs'have'both'mortgages'and'assets'
  Iden5fy'borrowers'as'agents'with'lille'liquid'financial'assets'in'SCF'
  Kaplan'and'Violante'(2012)'
Standard'mortgage'contracts'specify'accumula5on'of'equity''
  Replace'simple'collateral'constraint'with'
Db,t ≤ θ pt dt
dt = (1 − ρ) dt −1 + hb,t +1 − (1 − δ ) hb,t
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Taking'the'model'to'the'data:'Challenges'
In'the'data,'many'HHs'have'both'mortgages'and'assets'
  Iden5fy'borrowers'as'agents'with'lille'liquid'financial'assets'in'SCF'
  Kaplan'and'Violante'(2012)'
Standard'mortgage'contracts'specify'accumula5on'of'equity''
  Replace'simple'collateral'constraint'with'
Db,t ≤ θ pt dt
dt = (1 − ρ) dt −1 + hb,t +1 − (1 − δ ) hb,t
€
  ρ"="δ
"'
Db,t ≤ θ pt hb,t +1
  ρ">"δ'
'
'HHs'accumulate'equity'over'5me'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Calibra5on'
Economy in the 1990s
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Quarterly'calibra5on'
Parameter
Value
Source/Target
Discount factor borrower (βb)
0.9879
5% real mortgage rate
Discount factor lender (βl)
0.9938
•  2.5% decline in real mortgage rates
•  ~ Krusell and Smith (1998)
•  ~ Carroll et al. (2013)
Depreciation (δ)
0.003
Fixed Asset Tables
0.80
•  Median LTV of new or recently
refinanced mortgages of liquidity
constrained HHs in the SCF
Maximum LTV (θ)
•  Evidence from Duca et al. (2012)
•  Collateral constraint close to binding
Amortization (ρ)
0.0056
Jus5niano,'Primiceri,'Tambalo:'
•  Mortgage-to-RE ratio of liquidity
constrained HHs in the SCF (43%)
Credit'supply'and'the'housing'boom'
Outline'

Model''

Parameteriza5on'

Quan5ta5ve'results'
  Expansion'in'credit'supply'
  Loosening'of'collateral'requirements'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'

Star5ng'in'2000,'simulate'the'effects'of'a'gradual'relaxa5on'of'
mortgage'lending'constraints'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'

Star5ng'in'2000,'simulate'the'effects'of'a'gradual'relaxa5on'of'
mortgage'lending'constraints'
  Securi%za%on1and1tranching111'''pension'and'money'market'funds'gain'
'
'
'
''''''''''''access'to'mortgage'lending'
  Securi%za%on1and1tranching111'''reduce'banks’'capital'requirements'for'
'
'
'
''''''''''''mortgage'lending'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Securi5za5on'over'5me'
Value of outstanding RMBSs relative to GDP
'!"
)*+,-."
/0,1)*+,-."
&#"
percent
&!"
%#"
%!"
$#"
$!"
#"
!"
$((!"
$((#"
%!!!"
Jus5niano,'Primiceri,'Tambalo:'
%!!#"
%!$!"
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'

Star5ng'in'2000,'simulate'the'effects'of'a'gradual'relaxa5on'of'
mortgage'lending'constraints'
  Securi5za5on'and'tranching''''''pension'and'money'market'funds'gain'
'
'
'
'''''''''''access'to'mortgage'lending'
  Securi5za5on'and'tranching''''''reduce'banks’'capital'requirements'for'
'
'
'
'''''''''''mortgage'lending'
  SIVs1allow1banks1to1move1assets1off1balance1sheets11


not'coun5ng'them'towards'riskQweighted'capital'
Around'2003'regulators'disregarded'recommenda5ons'to'apply'to'them'the'
same'riskQweighted'capital'requirements'as'other'types'of'assets,'thereby'
facilita5ng'massive'regulatory'arbitrage'(Acharya'and'Schnabel,'2009)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'

Star5ng'in'2000,'simulate'the'effects'of'a'gradual'relaxa5on'of'
mortgage'lending'constraints'
  Securi5za5on'and'tranching''''''pension'and'money'market'funds'gain'
'
'
'
'''''''''''access'to'mortgage'lending'
  Securi5za5on'and'tranching''''''reduce'banks’'capital'requirements'for'
'
'
'
'''''''''''mortgage'lending'
  SIVs'allow'banks'to'move'assets'off'balance'sheets''


not'coun5ng'them'towards'riskQweighted'capital'
Around'2003'regulators'disregarded'recommenda5ons'to'apply'to'them'the'
same'riskQweighted'capital'requirements'as'other'types'of'assets,'thereby'
facilita5ng'massive'regulatory'arbitrage'(Acharya'and'Schnabel,'2009)'
  Foreign1capital1inflows1from'Emerging'Asia'+'oil'producing'countries'

mostly'directed'towards'Government'bonds'and'Agency'MBSs'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Foreign'capital'inflows'
Current account deficit relative to GDP
*#
)#
percent
(#
'#
&#
%#
"#
$#
"++$#
"++(#
%$$$#
%$$(#
%$"$#
!"#
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'

Star5ng'in'2000,'simulate'the'effects'of'a'gradual'relaxa5on'of'
mortgage'lending'constraints'
  Securi5za5on'and'tranching''''''pension'and'money'market'funds'gain'
'
'
'
'''''''''''access'to'mortgage'lending'
  Securi5za5on'and'tranching''''''reduce'banks’'capital'requirements'for'
'
'
'
'''''''''''mortgage'lending'
  SIVs'allow'banks'to'move'assets'off'balance'sheets''


not'coun5ng'them'towards'riskQweighted'capital'
Around'2003'regulators'disregarded'recommenda5ons'to'apply'to'them'the'
same'riskQweighted'capital'requirements'as'other'types'of'assets,'thereby'
facilita5ng'massive'regulatory'arbitrage'(Acharya'and'Schnabel,'2009)'
  Foreign'capital'inflows'from'Emerging'Asia'+'oil'producing'countries'


mostly'directed'towards'Government'bonds'and'Agency'MBSs'
Experiment'5med'to'“complete”'the'transi5on'in'2006'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'
L relative to income
1.3
1.2
€
1.1
1
0.9
0.8
0.7
0.6
1990
1992
1994
1996
1998
Jus5niano,'Primiceri,'Tambalo:'
2000
2002
2004
2006
2008
Credit'supply'and'the'housing'boom'
Experiment'1:'Loosening'of'lending'constraints'
Annualized mortgage rate
House prices
6
150
5
140
4
130
3
120
2
110
1
100
0
1990
1995
2000
2005
1990
Debt−to−GDP ratio
1995
2000
2005
Debt−to−real estate ratio
0.55
1.2
0.5
1
0.45
0.4
0.8
0.35
0.6
1990
1995
2000
2005
Jus5niano,'Primiceri,'Tambalo:'
0.3
1990
1995
2000
2005
Credit'supply'and'the'housing'boom'
Experiment'2:'Loosening'of'collateral'requirements'

Standard'model'without'lending'constraints'

Simulate'the'effects'of'a'gradual'relaxa5on'of'collateral'
requirements'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Standard'model'without'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
Db
Credit'supply'and'the'housing'boom'
Standard'model'without'lending'constraint'
R
1/βb
1/βl
Demand of funds
Supply of funds
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
Db
Credit'supply'and'the'housing'boom'
Experiment'2:'Loosening'of'collateral'requirements'

Standard'model'without'lending'constraints'

Simulate'the'effects'of'a'gradual'relaxa5on'of'collateral'
requirements'
  θ'from'0.8'to'1.02,'to'match'the'increase'in'HH'debt'of'experiment'1'
  ρ'from'0.0056'to'0.0041,'to'match'the'increase'in'HH'debt'of'experiment'1'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'2:'Loosening'of'collateral'requirements'
(a): Maximum LTV
−3
7
x 10
(b): Speed of repayment
6.5
1.1
6
1
5.5
0.9
5
4.5
0.8
4
0.7
0.6
1990
3.5
1995
2000
2005
Jus5niano,'Primiceri,'Tambalo:'
3
1990
1995
2000
2005
Credit'supply'and'the'housing'boom'
Experiment'2:'Loosening'of'collateral'requirements'(θ)'
Annualized mortgage rate
House prices
6
150
5
140
4
130
3
120
2
1
0
1990
110
Lending constraints
Collateral constraints:
1995
2000
100
2005
1990
Debt−to−GDP ratio
1995
2000
2005
Debt−to−real estate ratio
0.55
1.2
0.5
1
0.45
0.4
0.8
0.35
0.6
1990
1995
2000
2005
Jus5niano,'Primiceri,'Tambalo:'
0.3
1990
1995
2000
2005
Credit'supply'and'the'housing'boom'
Experiment'2:'Loosening'of'collateral'requirements'(ρ)'
Annualized mortgage rate
House prices
6
150
5
140
4
130
3
120
2
1
0
1990
Lending constraints
Collateral constraints:
Collateral constraints:
1995
2000
110
100
2005
1990
Debt−to−GDP ratio
1995
2000
2005
Debt−to−real estate ratio
0.55
1.2
0.5
0.45
1
0.4
0.8
0.35
0.6
1990
1995
2000
2005
Jus5niano,'Primiceri,'Tambalo:'
0.3
1990
1995
2000
2005
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
Economy in the 1990s
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
€
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
R
1/βb
1/βl
Demand of funds
Supply of funds
L
Db
θ  p  hb
Jus5niano,'Primiceri,'Tambalo:'
€
Credit'supply'and'the'housing'boom'
Experiment'3:'Loosening'of'collateral'requirements'(θ)'in'a'
'
'''''''''model'with'lending'constraints'
Annualized mortgage rate
House prices
6
150
5
140
4
130
3
120
2
110
1
100
0
1990
1995
2000
2005
2010
1990
Debt−to−GDP ratio
1995
2000
2005
2010
Debt−to−real estate ratio
0.55
1.2
0.5
0.45
1
0.4
0.8
0.35
0.6
1990
1995
2000
2005
2010
Jus5niano,'Primiceri,'Tambalo:'
0.3
1990
1995
2000
2005
Credit'supply'and'the'housing'boom'
2010
Conclusions'

Increased'capacity'to'lend'''''outward'shir'in'supply'of'credit'

'Explains'a'large'frac5on'
  boom'in'house'prices'
  boom'in'HH'debt'
  decline'in'mortgage'rates'
  constant'debtQtoQcollateral'ra5o'

Loosening'of'collateral'requirements'not'an'important'driving'
force.'At'odds'with'the'behavior'of'
  mortgage'rates'
  house'prices'
  debtQtoQcollateral'ra5o'
  If'anything,'explains'why'prices'started'to'fall'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
More'generally'

Shir'the'focus'from'borrowing'constraints'to'lending'constraints'

Interac5on'between'the'two'is'key'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
The'story'in'words'

The'apparent'safety'of'the'financial'sector’s'collec5ve'balance'
sheet'was'alributable'to'the'fact'that'the'biggest'global'banks'
had'amassed'vast'quan55es'of'AAAQrated'(“safe”)'tranches'
backed'by'residen5al'mortgages.'These'assets'had'historically'
been'safer'than'similarly'rated'corporate'loans.'This'was'the'
principal'reason'behind'their'lower'risk'charge'(by'a'factor'of'
five)'under'the'Basel'capital'requirements'that'were'in'place'for'
European'banks,'for'allowing'the'US'commercial'banks'to'park'
these'in'offQbalance'sheet'vehicles'with'lille'capital,'and'le:ng'
investment'banks'use'internal'models'for'risk'management'that'
largely'ignored'the'tail'risk'of'a'secular'housing'collapse.'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
RiskQweighted'capital'ra5o'

In'the'United'States,'depository'ins5tu5ons'are'subject'to'riskQ
based'capital'guidelines'issued'by'the'Fed.'These'guidelines'are'
used'to'evaluate'capital'adequacy'based'primarily'on'the'
perceived'credit'risk'associated'with'balance'sheet'assets,'as'well'
as'certain'offQbalance'sheet'exposures'such'as'unfunded'loan'
commitments,'lelers'of'credit,'and'deriva5ves'and'foreign'
exchange'contracts.'The'riskQbased'capital'guidelines'are'
supplemented'by'a'leverage'ra5o'requirement'

'To'be'adequately'(well)'capitalized'under'federal'bank'regulatory'
agency'defini5ons,'a'bank'holding'company'must'have'a'TierQ1'
capital'ra5o'of'at'least'4%'(6%),'a'combined'TierQ1'and'TierQ2'
capital'ra5o'of'at'least'8%'(10%),'and'a'leverage'ra5o'of'at'least'
4%'(5%)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
NonQagency'MBSs'(Mayer)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Share'of'securi5zed'mortgages'(Krainer'and'Laderman,'2011)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Securi5za5on'rates'(Simkovic,'2013)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Mortgage'spreads'(1QyearQARM'minus'the'FFR)'
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'
Senior'Loan'Officer'Opinion'Survey'
2007-Q1
Jus5niano,'Primiceri,'Tambalo:'
Credit'supply'and'the'housing'boom'