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 explores two (credit supply) shocks: an increased inow of global savings into the United States, and innovations in the securitization of mortgage credit. I model the interaction of financially constrained commercial banks and mortgage securitizers, generating a novel balance sheet effect: changes in the distribution ofaggregate mortgage credit quantity are linked to changes in mortgage spreads. Only innovation in securitization (direct relaxation of the securitizers' financial constraint) matches mortgage market dynamics.