Bank Credit Supply and Shadow Mortgage Growth

With a novel application of a simple supply-demand decomposition methodology to residential mortgage markets, I analyze the role of bank credit supply, shadow lender’s own supply, and local demand in lending growth by shadow mortgage companies. I show that shadow lending grew faster in counties exposed to increases of bank credit supply. At the same time, shadow firms’ own supply shocks explain more variation in shadow lending growth than bank supply shocks. These results suggest that shadow lenders have operational advantages over banks, but are also connected to them, perhaps via warehouse lines of credit.