WP 21-20 – We study the evolution of U.S. mortgage credit supply during the COVID-19 pandemic.
Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on “plain-vanilla” conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.
Research in Focus — Mortgage lending surged in the pandemic's first year. But lower interest rates weren’t fully passed through to consumers, and access to credit diminished for the riskiest borrowers.
