The 2014 U.S. liquidity coverage ratio (LCR) gave preferential liquidity weights to mortgage-backed securities (MBS) backed by GNMA versus those backed by the Government Sponsored Enterprises (GSEs). We show that this policy created a liquidity premium for GNMA-backed MBS relative to GSE-backed MBS. Then, exploiting cross-sectional differences in funding sources across lenders, we show that LCR policy has led to a higher market share for nonbanks and lenders reliant on securitization. It also led to an increased supply of credit for risky borrowers and to tighter standards among loans eligible for purchase by the GSEs. In 2006, non-depository institutions (“nonbanks” for short) accounted for 43% of total subprime loans (Lux and Greene 2015). Nearly all of these institutions, which are unable to access the lending of last resort facilities of the Fed, either defaulted or were restructured post-2007. Moreover, Demyanyk and Loutskina (2016) show that their activities contributed to a deterioration of lending standards in mortgage markets. Figure 1 shows that originations by nonbanks comprised the majority of the FHA market for new purchase loans right before the crisis, at the peak of the subprime boom. By 2016 they have even surpassed those levels. This fact worries economists and policymakers (Pinto  2015, Wallace 2016, Wall Street Journal 2017) because FHA mortgagors usually have higher loan-to-value ratios, lower credit scores and higher default rates over the business cycle(Frame, Gerardi and Tracy 2016).