Liquidity Shocks and the US Housing Credit Crisis of 2007–2008

There is extensive anecdotal evidence to suggest that a significant tightening in credit conditions, or a 'credit crunch', occurred in the United States following the collapse of the loan securitisation market in 2007. However, there has been surprisingly little formal testing for the existence of a credit crunch in the context of the US housing market. In this paper I examine whether the fall in mortgage credit over 2007–2008 was caused by a reduction in credit supply which, in turn, can be traced to a fall in the amount of financing available to mortgage lenders. I use the differential exposures of individual mortgage lenders to the collapse of the securitisation market in 2007 as a source of cross-lender variation in lender financing conditions and assess the impact on residential mortgage lending. Using loan-level information to control for unobservable credit demand shocks, I show that mortgage lenders that were particularly reliant on loan securitisation disproportionately reduced the supply of mortgage credit. The negative liquidity shock caused by the shutdown of the securitisation market explains a significant share of the aggregate decline in mortgage credit during this crisis.