Housing Booms and Busts: Dissecting Housing and MBS Markets Linkages

Abstract This paper estimates an SVAR with housing and mortgage markets to study the 2007–2009 financial crisis along two dimensions. Firstly, it examines the links between the composition of mortgage-backed securities (MBS) and the US housing market leading up to the financial crisis. Secondly, it investigates the role of liquidity shocks and GSEs in triggering the financial crisis. Four main findings emerge from the estimates. Firstly, house prices increase following shocks to private MBS issuance activity. Secondly, positive housing demand shocks increase the share of private MBS issuances relative to securities issued by the GSEs. These housing and MBS market linkages are economically and statistically significant during the 1998–2006 housing price boom. Thirdly, liquidity shocks emerge as the most important driver of the commercial paper spread during the 2007–2009 financial crisis. Lastly, the role of the GSEs in the collapse of the MBS market is limited.