Do Mortgage Loans Respond Perversely to Monetary Policy?

We investigate the response of loan growth to monetary policy shocks while controlling for loan securitization. Our major finding is that while commercial and industrial (C&I) loans and consumer loans respond to monetary policy asymmetrically according to theoretical predictions, mortgage loans show a reverse asymmetric response. In other words, while other loans are more responsive to contractionary than to expansionary shifts in monetary policy of the same magnitude, mortgage loans tend to respond inversely. Contrary to the bank lending channel predictions, expansionary monetary policy increases mortgage loan growth more than contractionary monetary policy of the same magnitude reduces this growth. We find that this reverse asymmetric response of mortgage loans is mainly driven by the securitization of these loans. Further, we show that this result is most pronounced for single-family home mortgages.