alejandro’jus5niano’ giorgioprimiceri - csefcreditsupplyandthehousingboom’ jusniano...
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![Page 1: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/1.jpg)
Credit supply and the housing boom
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Alejandro Jus5niano Federal Reserve Bank of Chicago
Giorgio Primiceri Northwestern University
Andrea Tambalo: Federal Reserve Bank of New York
Anacapri June 26, 2014
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
1. Decline in real mortgage rates
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
2. Unprecedented boom and bust in (real) house price
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
3. Boom and bust in household debt
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
4. Debt-‐to-‐collateral ra5o: constant and then spikes
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The US economy in the 2000s: Four stylized facts
① Decline in mortgage rates
② Unprecedented boom-‐bust cycle in house prices
③ Massive HH debt accumula5on, and then deleveraging
④ Debt-‐to-‐collateral ra5o constant, and then spikes
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
This paper
Ques%on: What is the fundamental driver behind these facts?
![Page 8: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/8.jpg)
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
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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 debt-‐to-‐collateral ra5o during the boom
![Page 10: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/10.jpg)
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 debt-‐to-‐collateral 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
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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 debt-‐to-‐collateral 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
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Outline
Model
Parameteriza5on
Quan5ta5ve results Expansion in credit supply Loosening of collateral requirements
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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 Lenders
Impa5ent Borrowers
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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 Lenders
Impa5ent Borrowers
No produc5on income is exogenous
Fixed supply of houses
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The problem of the borrowers
€
maxE0 βbt u cb,t( ) + v hb,t( )[ ]
t=0
∞
∑
cb,t + pt hb,t+1 − 1−δ( )hb,t[ ] + Rt−1Db,t−1 ≤ yb,t + Db,t
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The problem of the borrowers
Borrowing is limited by a collateral constraint €
maxE0 βbt u cb,t( ) + v hb,t( )[ ]
t=0
∞
∑
cb,t + pt hb,t+1 − 1−δ( )hb,t[ ] + Rt−1Db,t−1 ≤ yb,t + Db,t
€
Db,t ≤θ pt hb,t+1
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The problem of the borrowers
Borrowing is limited by a collateral constraint
Associated mul5plier: μ ≥ 0
€
maxE0 βbt u cb,t( ) + v hb,t( )[ ]
t=0
∞
∑
cb,t + pt hb,t+1 − 1−δ( )hb,t[ ] + Rt−1Db,t−1 ≤ yb,t + Db,t
€
Db,t ≤θ pt hb,t+1
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The problem of the lenders ( βl > βb )
€
maxE0 βlt u cl ,t( ) + v hl,t( )[ ]
t=0
∞
∑
cl,t + pt hl,t+1 − 1−δ( )hl,t[ ] + Rt−1Dl,t−1 ≤ yl ,t + Dl,t
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The problem of the lenders ( βl > βb )
Mortgage lending is limited by a lending constraint
€
−Dl ,t ≤ L
€
maxE0 βlt u cl ,t( ) + v hl,t( )[ ]
t=0
∞
∑
cl,t + pt hl,t+1 − 1−δ( )hl,t[ ] + Rt−1Dl,t−1 ≤ yl ,t + Dl,t
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The lending constraint
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
€
−Dl ,t ≤ L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The lending constraint
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: Money-‐market funds, pension funds and insurance companies are restricted by regula5ons to holding only the safest securi5es
€
−Dl ,t ≤ L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
The lending constraint
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: Money-‐market funds, pension funds and insurance companies are restricted by regula5ons to holding only the safest securi5es
Can be interpreted as stemming from leverage restric5on or regulatory-‐capital requirement of financial intermediaries
€
−Dl ,t ≤ L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Two addi5onal simplifying assump5ons
Implica5ons
Borrowers are marginal buyers of houses
Varia5on in house prices only due to varia5on in discoun5ng
Rigid demand for houses by the lenders
Linear u5lity in consump5on
€
pt =βb
1− µtθ mrsb,t+1
h,c + 1−δ( )pt+1[ ]
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Two addi5onal simplifying assump5ons
Implica5ons
Borrowers are marginal buyers of houses
Varia5on in house prices only due to varia5on in discoun5ng
When collateral constraint binds ( μ > 0 ), θ p
Rigid demand for houses by the lenders
Linear u5lity in consump5on
€
pt =βb
1− µtθ mrsb,t+1
h,c + 1−δ( )pt+1[ ]
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Interac5on of borrowing and lending constraints
Borrowing constraint:
Lending constraint:
€
Db,t ≤θ pt hb,t+1
€
−Dl ,t ≤ L
€
Db,t ≤ L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Interac5on of borrowing and lending constraints
Borrowing constraint:
Lending constraint:
Which constraint binds is
exogenous:
endogenous:
€
Db,t ≤θ pt hb,t+1
€
−Dl ,t ≤ L
€
Db,t ≤ L
€
L and θ
€
pt =βb
1− µtθmrs+ 1−δ( )pt+1[ ]
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Standard model without lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Non-‐binding lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
- R = 1/βl
- Collateral constraint binding (µ>0)
-
€
pt =βb
1− µtθmrs+ 1−δ( )pt+1[ ]
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Binding lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
- R = 1/βb
- Collateral constraint not binding
-
€
pt = βb mrs+ 1−δ( )pt+1[ ]
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
- R = 1/βl
- Collateral constraint binding (µ>0)
-
€
pt =βb
1− µtθmrs+ 1−δ( )pt+1[ ]
![Page 31: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/31.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 32: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/32.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 35: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/35.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 36: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/36.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 37: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/37.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 38: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/38.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 39: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/39.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Relaxing the lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 40: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/40.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Outline
Model
Parameteriza5on
Quan5ta5ve results Expansion in credit supply Loosening of collateral requirements
![Page 41: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/41.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Parameter values
Calibrate parameters to match 1990-‐2000
Micro data: Survey of Consumer Finances
Triennial detailed survey data of US households’ balance sheet
![Page 42: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/42.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Taking the model to the data: Challenges
① In the data, many HHs have both mortgages and assets Iden5fy borrowers as agents with likle liquid financial assets in SCF Kaplan and Violante (2012)
② Standard mortgage contracts specify accumula5on of equity Replace simple collateral constraint with
ρ = δ
ρ > δ HHs accumulate equity over 5me
€
Db,t ≤θ pt hb,t+1
€
Db,t ≤θ pt dtdt = 1− ρ( )dt−1 + hb,t+1 − 1−δ( )hb,t
![Page 43: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/43.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Calibra5on
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
Economy in the 1990s
![Page 44: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/44.jpg)
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
Maximum LTV (θ) 0.80
• Median LTV of new or recently refinanced mortgages of liquidity constrained HHs in the SCF
• Evidence from Duca et al. (2012)
Amortization (ρ) 0.0056
• Collateral constraint close to binding
• Mortgage-to-RE ratio of liquidity constrained HHs in the SCF (43%)
![Page 45: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/45.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Outline
Model
Parameteriza5on
Quan5ta5ve results Expansion in credit supply Loosening of collateral requirements
![Page 46: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/46.jpg)
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
![Page 47: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/47.jpg)
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%on and tranching pension and money market funds gain access to mortgage lending
Securi%za%on and tranching reduce banks’ capital requirements for mortgage lending
![Page 48: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/48.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Securi5za5on over 5me
!"
#"
$!"
$#"
%!"
%#"
&!"
&#"
'!"
$((!" $((#" %!!!" %!!#" %!$!"
)*+,-." /0,1)*+,-."
perc
ent
Value of outstanding RMBSs relative to GDP
![Page 49: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/49.jpg)
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 risk-‐weighted capital Around 2003 regulators disregarded recommenda5ons to apply to them the same risk-‐weighted capital requirements as other types of assets, thereby facilita5ng massive regulatory arbitrage (Acharya and Schnabel, 2009)
![Page 50: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/50.jpg)
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 risk-‐weighted capital Around 2003 regulators disregarded recommenda5ons to apply to them the same risk-‐weighted 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
![Page 51: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/51.jpg)
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 risk-‐weighted capital Around 2003 regulators disregarded recommenda5ons to apply to them the same risk-‐weighted 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
![Page 52: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/52.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 1: Loosening of lending constraints
1990 1992 1994 1996 1998 2000 2002 2004 2006 20080.6
0.7
0.8
0.9
1
1.1
1.2
1.3
€
L relative to income
![Page 53: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/53.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 1: Loosening of lending constraints
1990 1995 2000 20050
1
2
3
4
5
6Annualized mortgage rate
1990 1995 2000 2005
100
110
120
130
140
150
House prices
1990 1995 2000 20050.6
0.8
1
1.2
Debt to GDP ratio
1990 1995 2000 20050.3
0.35
0.4
0.45
0.5
0.55
Debt to real estate ratio
![Page 54: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/54.jpg)
Jus5niano, Primiceri, Tambalo: 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
![Page 55: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/55.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Standard model without lending constraint
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
![Page 56: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/56.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Standard model without lending constraint
Db
R
1/βb
1/βl
Demand of funds
Supply of funds
θ p hb
![Page 57: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/57.jpg)
Jus5niano, Primiceri, Tambalo: 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
![Page 58: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/58.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 2: Loosening of collateral requirements (θ)
1990 1995 2000 20050
1
2
3
4
5
6Annualized mortgage rate
1990 1995 2000 2005
100
110
120
130
140
150
House prices
1990 1995 2000 20050.6
0.8
1
1.2
Debt to GDP ratio
1990 1995 2000 20050.3
0.35
0.4
0.45
0.5
0.55
Debt to real estate ratio
Lending constraintsCollateral constraints:
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
Economy in the 1990s
![Page 61: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/61.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
Economy at the end of 2005
![Page 62: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/62.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 63: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/63.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 64: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/64.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 65: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/65.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 66: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/66.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
Db
R
1/βb
1/βl
Demand of funds
θ p hb
Supply of funds
€
L
![Page 67: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/67.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 3: Loosening of collateral requirements (θ) in a model with lending constraints
1990 1995 2000 2005 20100
1
2
3
4
5
6Annualized mortgage rate
1990 1995 2000 2005 2010
100
110
120
130
140
150
House prices
1990 1995 2000 2005 20100.6
0.8
1
1.2
Debt to GDP ratio
1990 1995 2000 2005 20100.3
0.35
0.4
0.45
0.5
0.55
Debt to real estate ratio
![Page 68: Alejandro’Jus5niano’ GiorgioPrimiceri - CSEFCreditsupplyandthehousingboom’ Jusniano ,Primiceri, Tambalo:’’’ Creditsupplyandthehousingboom Alejandro’Jus5niano’ Federal’Reserve’Bank’of’Chicago](https://reader035.vdocuments.us/reader035/viewer/2022071408/61012b32a62d95179f2b2a1b/html5/thumbnails/68.jpg)
Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Conclusions
Increased capacity to lend outward shiq in supply of credit
Explains a large frac5on boom in house prices
boom in HH debt
decline in mortgage rates constant debt-‐to-‐collateral ra5o
Loosening of collateral requirements not an important driving force. At odds with the behavior of mortgage rates
house prices debt-‐to-‐collateral ra5o If anything, explains why prices started to fall
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Conclusions
What if collateral requirements depend on some of the factors shiqing also the supply of funds? Not a property of the standard model of collateralized debt
Even in this case, our results suggest that credit supply has to shiq more than demand to account for the boom phase of the cycle
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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 akributable to the fact that the biggest global banks had amassed vast quan55es of AAA-‐rated (“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 off-‐balance sheet vehicles with likle capital, and le:ng investment banks use internal models for risk management that largely ignored the tail risk of a secular housing collapse.
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Risk-‐weighted capital ra5o
In the United States, depository ins5tu5ons are subject to risk-‐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 off-‐balance sheet exposures such as unfunded loan commitments, lekers of credit, and deriva5ves and foreign exchange contracts. The risk-‐based 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 Tier-‐1 capital ra5o of at least 4% (6%), a combined Tier-‐1 and Tier-‐2 capital ra5o of at least 8% (10%), and a leverage ra5o of at least 4% (5%)
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Non-‐agency MBSs (Mayer)
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Share of securi5zed mortgages (Krainer and Laderman, 2011)
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Securi5za5on rates (Simkovic, 2013)
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Mortgage spreads (1-‐year-‐ARM minus the FFR)
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Senior Loan Officer Opinion Survey
2007-Q1
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 2: Loosening of collateral requirements
1990 1995 2000 20050.6
0.7
0.8
0.9
1
1.1
(a): Maximum LTV
1990 1995 2000 20053
3.5
4
4.5
5
5.5
6
6.5
7x 10 3 (b): Speed of repayment
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Experiment 2: Loosening of collateral requirements (ρ)
1990 1995 2000 20050
1
2
3
4
5
6Annualized mortgage rate
1990 1995 2000 2005
100
110
120
130
140
150
House prices
1990 1995 2000 20050.6
0.8
1
1.2
Debt to GDP ratio
1990 1995 2000 20050.3
0.35
0.4
0.45
0.5
0.55
Debt to real estate ratio
Lending constraintsCollateral constraints:Collateral constraints:
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Jus5niano, Primiceri, Tambalo: Credit supply and the housing boom
Some literature
Importance of borrowing constraints in the boom-‐bust of the 2000s Boom:
Favilukis, Ludvigson, Van Nieuwerburgh (2013), Boz and Mendoza (2012), Garriga, Manuelli and Peralta-‐Alva (2012), Midrigan and Philippon (2011)
Bust: Guerrieri and Lorenzoni (2012), Eggertsson and Krugman (2012), Hall (2012)
We concentrate on barriers to lending and their interac5on with collateral constraints
Constraints on composi5on of balance sheet of intermediaries Gertler and Kiyotaki (2010), Adrian and Shin (2010), Adrian and Boyarchenko
(2012 and 2013), Dewachter and Wouters (2012), He and Krishnamurty (2013), Brunnermeier and Sannikov (2014), etc…
We concentrate on the link between the availability of credit, household debt and home prices