Clogged intermediation: Were home buyers crowded out?

• Main Authors: CHOI, Hyunsoo, CHOI, Hyun-Soo, KIM, Jung-Eun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2017
• Subjects: Credit rationing; mortgage lending; post-crisis slump; monetary transmission; distributional effects; Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/5411; https://ink.library.smu.edu.sg/context/lkcsb_research/article/6410/viewcontent/LoanSubstitution.pdf
• Institution: Singapore Management University

Post-crisis policy interventions significantly increased the demand for mortgage refinancing, but could this surge in refinancing applications have crowded out the supply of credit to home buyers? In this paper, we examine two frictions that hamper financial intermediation and result in banks' substitution of home purchase loans for refinance loans: The risk capacity channel through which banks with limited risk appetites prefer safer loans over riskier loans, and the operating capacity channel through which banks with limited operating capacities prefer applications that require less screening time. We find that following the recent financial crisis, banks facing these capacity constraints indeed rationed credit to home purchase borrowers.