Abstract: I document the role of a credit crunch in driving the housing market in the 1970s. Binding Regulation Q ceilings tightened funding and induced a credit crunch across the financial sector. I show that the crunch was particularly severe in housing because the primary mortgage lenders, savings and loan associations (S&Ls), lacked the funding flexibility banks had. Banks could substitute rate-capped retail deposits with wholesale funds exempt from the ceiling, whereas S&Ls could not. At the local level, a 1 pp tightening in the effective S&L ceiling is followed over the next year by a 4.7 pp drop in the mortgage growth rate and a 1.1 pp drop in the real house-price growth rate. Effects through banks are muted. This mechanism operates alongside demand-side explanations and helps to explain the joint boom-bust patterns in prices and quantities in the housing market during this era.
Abstract: Adjustable-rate mortgages (ARMs) transmit monetary policy less directly than often assumed. We exploit quasi-experimental variation in ARM rate reset timing in Portugal---where over 92% of mortgages are indexed to Euribor---around the ECB’s 2022–2023 tightening cycle to estimate responses to mortgage payment shocks. After reset dates, mortgage renegotiations increase by 10 percentage points, lender switching by 4, partial prepayments by 5, and full prepayments by 3, offsetting about 17% of the payment increase implied by policy rates. Responses occur only immediately after resets, consistent with selective inattention, and are largest among younger, more educated, and higher-balance borrowers. Supply-side factors amplify these effects: as rates rise and bank competition intensifies, households at more flexible banks renegotiate, switch lenders, and prepay more, while greater broker presence further increases lender switching. Our findings suggest that monetary policy pass-through in ARM-dominated markets depends on borrower behavior, market frictions, and sticky deposit rates.
Discussant: Andreas Fuster, École Polytechnique Fédérale de Lausanne
Matteo Crosignani, Federal Reserve Bank of New York
Saketh Prazad, Harvard University
Abstract: We show that banks “extended-and-pretended” their impaired CRE mortgages in the post-pandemic period to avoid writing off their capital, leading to credit misallocation and a buildup of financial fragility. We detect this behavior using loan-level supervisory data on maturity extensions, bank assessment of credit risk, and realized defaults for loans to property owners and REITs. Extend-and-pretend crowds out new credit provision, leading to a 4.8–5.3% drop in CRE mortgage origination since 2022:Q1 and fuels the amount of CRE mortgages maturing in the near term. As of 2023:Q4, this “maturity wall” represents 27% of bank capital.
Discussant: David Glancy, Federal Reserve Board of Governors
