Mortgage markets are central to monetary policy transmission. We show that this is because monetary policy impacts the supply of mortgage credit by the two largest mortgage holders: banks and the Federal Reserve. The Fed's supply of mortgage credit consists of buying or selling mortgage-backed securities (MBS) under its quantitative easing and tightening (QE and QT) programs. Banks' supply of mortgage credit is driven by the deposits channel of monetary policy. Under the deposits channel, when the Fed lowers rates, banks receive large inflows of deposits. They invest these deposits in long-term fixed-rate assets, in particular MBS, to match the interest-rate sensitivity of their income and expenses. The deposits channel reverses when the Fed raises rates: deposits flow out and banks sell MBS. Through the combined effect of QE/QT and the deposits channel, monetary policy drives mortgage rates, mortgage originations, and residential investment. We show that QE/QT and the deposits channel played a large role in the expansion and contraction of mortgage credit during the 2020--24 monetary policy cycle. Our results imply that monetary policy will continue to operate through these channels in future cycles.

Firms adjust their capital structures in response to fluctuation in capital supply, which leaves them exposed to subsequent risks. When there are more flows to loan funds relative to bond funds, firms borrow more in floating-rate loans relative to fixed-rate bonds. This relationship is strong both in the aggregate time series and in the cross section of firms, where we construct firm-specific capital flow measures based on sticky fund-firm relationship. While saving on the current cost of capital, these flow-induced debt structure changes expose firms to future changes in interest rates. During a rate hike, firms that have accumulated more floating-rate debt due to past capital flows experience larger stock declines and invest less real capital. Using capital flows as instruments, we estimate a significantly larger impact of the floating-rate channel of monetary policy than previously documented in the literature.

A key function of government-sponsored enterprises (GSEs) is to insure mortgage default risk, yet little is known about whether these guarantees are fairly priced. Using a replicating portfolio and market prices of reinsured mortgage default risk to value the net cash flows from guaranteeing $5 trillion mortgages, I show that GSEs shifted from providing a subsidy of 20 basis points (bps) pre-crisis to generating risk-adjusted profits of 30 bps in the post-crisis period. Using a regression discontinuity design around the conforming loan limit, I document that this higher pricing is passed on to borrowers via higher conforming mortgage rates. Following this increase, banks reduce their reliance on GSE securitization but still securitize most mortgages through GSEs despite paying an above-market rate. Overall, these findings imply lenders value using GSEs for reasons other than government-subsidized funding in the post-crisis period.