Essays in Consumer and Small Business Finance

Abstract

My dissertation consists of three essays in consumer and small business finance. The last US housing boom and the development of mortgage securitization are commonly believed to fuel the credit expansion before the financial crisis. The first two chapters contribute to these discussions by investigating the bank-lending channel through which housing shocks and mortgage securitization affect credit access of consumers and small businesses. In addition, home equity debt is also believed to play an important role over the last boom-and-bust cycle; and my third chapter investigates how the 2005 US bankruptcy reform affect consumers’ home equity borrowing behaviors. In the first chapter I show that the last US housing boom reduced renter credit access. In particular, banks reduced non-mortgage credit supply when they expanded mortgage lending to homeowners. As a consequence, renters living in locations where banks had more geographic exposure to the housing boom ended up borrowing less but defaulting more. This research suggests that policies affecting house prices and mortgage financing have broader implications for less well-off households that do not own a home. The second chapter explores the causal effect of mortgage securitization on small business lending. It is commonly believed that mortgage securitization frees up bank liquidity and increases the supply of illiquid loans. However, based on an instrumental variable approach I find that increasing the easiness of mortgage securitization reduces bank lending to small businesses, especially to the small-size and low-income borrowers. A possible explanation is that securitization increases bank risk-taking on retained mortgages, which may reduce bank incentive to issue small business loans. The last chapter examines the effect of bankruptcy protection on home equity borrowing and consumption smoothing. Based on a natural experiment of the 2005 US bankruptcy reform, I use a difference-in-difference method to show that consumers increased home equity borrowing when debtor protection at bankruptcy reduced. The house price sensitivity of consumption and entrepreneurship were also increased. My results suggest that reducing bankruptcy protection could lead to a stronger amplification effect of housing collateral over the business cycle.