Discussion Paper Details

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Title: How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic

Author(s): Andreas Fuster, Aurel Hizmo, Lauren Lambie-Hanson, James Vickery and Paul Willen

Publication Date: May 2021

Keyword(s): COVID-19, credit, Financial Intermediation, Fintech and mortgage

Programme Area(s): Financial Economics

Abstract: We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

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Bibliographic Reference

Fuster, A, Hizmo, A, Lambie-Hanson, L, Vickery, J and Willen, P. 2021. 'How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic'. London, Centre for Economic Policy Research.