Household Debt

Paper Session

Friday, Jan. 6, 2017 10:15 AM – 12:15 PM

Swissotel Chicago, Zurich E
Hosted By: American Economic Association
  • Chair: Luigi Guiso, Einaudi Institute for Economics and Finance

The Demand and Supply of Different Mortgage Maturities

Catherine Koch
,
Bank for International Settlements
Christoph Basten
,
Swiss Financial Market Supervisory Authority
Benjamin Guin
,
Bank of England

Abstract

We disentangle the demand and supply determinants of mortgage rate fixation periods. Our unique dataset features offers from multiple banks for each individual mortgage request. We find that households respond to the relative cost of different fixation periods. We also examine how banks influence fixation periods through several channels to trade off interest rate risk against credit risk, most crucially based on their interest rate risk exposure and other bank-level balance sheet characteristics.

Household Credit and Local Economic Uncertainty

Marco Di Maggio
,
Harvard University and NBER
Amir Kermani
,
University of California-Berkeley
Rodney Ramcharan
,
University of Southern California
Edison Yu
,
Federal Reserve Bank of Philadelphia

Abstract

This paper investigates the impact of uncertainty on consumer credit outcomes. Individual-level data on credit-card balances and mortgages reveal strong borrower-specific heterogeneity in response to changes in an equity-based measure of county-level economic uncertainty. Low-risk borrowers reduce their credit-card balances and use of mortgage credit in response to increased localized uncertainty, while lenders expand the availability of credit to these borrowers. The opposite is obtained for high-risk borrowers. The economic magnitudes are especially large during the recent financial crisis. This evidence suggests that localized uncertainty about economic conditions might independently affect aggregate economic activity through consumer credit markets.

Recourse Mortgages, Nominal Rigidities and Slow Recoveries

Pedro Gete
,
Georgetown University
Franco Zecchetto
,
Georgetown University

Abstract

Mortgage recourse systems, by discouraging default, magnify the impact of nominal rigidities and cause deeper and more persistent recessions in the presence of long-term debt. We study a quantitative model with agents heterogeneous in idiosyncratic income and housing values. Following a collapse of house prices, an economy with recourse mortgages induces lower default and, because of heterogeneity in the marginal propensity to consume and downward interest rate rigidities, depresses aggregate consumption relative to a non-recourse economy. Recourse mortgages can account for 25% of the difference in recovery between the U.S. (non-recourse country) and Spain (recourse country).

Distorted Advice in the Mortgage Market: Theory and Structural Estimation

Leonardo Gambacorta
,
Bank for International Settlements
Luigi Guiso
,
Einaudi Institute for Economics and Finance
Anton Tsoy
,
Einaudi Institute for Economics and Finance
Paolo Emilio Mistrulli
,
Bank of Italy
Andrea Pozzi
,
Einaudi Institute for Economics and Finance

Abstract

Complex financial decisions require sophistication which not all households possess. This exposes them to the risk of being exploited when seeking advice from intermediaries. We set up a structural model of financial advice and estimate it using administrative data on the universe of Italian mortgages. In the model banks have an ideal mix of fixed and adjustable rate mortgages and achieve it by both setting rates and providing advice to their clientele. “Sophisticated” households know which mortgage is best for them; “naive” households are instead susceptible to advice and will take the type of mortgage recommended by the bank. We recover the primitives of the model and use them to quantify the welfare implications of biased financial advice. The cost of the bias is equivalent to increasing the annual mortgage payment by 1,183 euros. Losses are bigger for the naive but also the sophisticated lose. Because even distorted advice conveys information, banning it altogether would result in a loss of 738 euros per year on average, mostly paid by the naive consumers. A financial education campaign is beneficial for all, though in different degrees.
Discussant(s)
Andreas Fuster
,
Federal Reserve Bank of New York
Scott Baker
,
Northwestern University
John Krainer
,
Federal Reserve Bank of San Francisco
Jason Allen
,
Bank of Canada
JEL Classifications
  • E4 - Money and Interest Rates
  • G1 - Asset Markets and Pricing