Household Finance and Post-crisis Regulation
Friday, Jan. 5, 2018 2:30 PM - 4:30 PM
- Chair: Amit Seru, Stanford University
The Effect of Debt on Default and Consumption: Evidence From Housing Policy in the Great Recession
AbstractThis paper empirically and theoretically analyzes the effect of debt reductions that reduce long-term but not short-term obligations. Isolating the effect of future obligations allows us to test alternative explanations for borrower default decisions and to analyze the consumption response to mortgage principal reduction for underwater borrowers. Our empirical analysis uses regression discontinuity and difference-in-differences research designs on de-identified bank account and credit bureau records from participants in the U.S. government’s Home Affordable Modification Program. We find that mortgage principal reductions worth an average of $70,000 have no impact on default or consumption for borrowers who remain underwater. Our results are sufficiently precise to rule out economically meaningful effects. We develop a quantitative lifecycle model that clarifies that borrowers’ short-term constraints govern their response to longterm debt obligations. When defaulting imposes utility costs in the short-term, default is driven by cash-flow shocks such as unemployment rather than by future debt burdens. When principal reductions do not push borrowers sufficiently above water so as to relax collateral constraints, consumption is unaffected because borrowers are unable to monetize increased housing wealth. Collateral constraints drive a wedge between an underwater borrower’s marginal propensity to consume out of cash and their marginal propensity to consume out of housing wealth. Our results help explain why policies that lowered current mortgage payments were more effective than principal reductions at stemming foreclosures and increasing demand during the Great Recession.
Regressive Mortgage Credit Redistribution in the Post-crisis Era
AbstractWe document four novel facts about mortgage origination after the 2008-2009 Financial Crisis. First, since 2011, mortgage lenders reduced the origination of conforming loans by 15% and increased the origination of jumbo loans by 21%. Second, the extent of redistribution increased monotonically with the size of the originator. Third, mortgages farther away from the conforming loan limit both above and below drove the redistribution, and hence systematic differences between conforming and non-conforming loans are unlikely to drive the results. Fourth, lending standards – measured as the ratio of households income over loan amount – became stricter for mid-sized loans and were relaxed for jumbo loans, and especially for loans above $700k. Results hold at the individual-loan level and zip-code level, and at the intensive margin and extensive margin. The collapse of the private-label securitization market, banks’ risk-management concerns, wealth polarization, post-crisis policies of GSEs, or pre-crisis indebtment are unlikely to explain the results. The results appear consistent with large banks reacting more to the increased costs of origination imposed by financial regulation.
Are Mortgage Regulations Affecting Entrepreneurship?
AbstractI show that rules designed to prevent unaffordable mortgage lending restrict self-employed households' access to credit and reduce entrepreneurship. I use eligibility criteria for exemptions from the Ability-to-Repay rule--a key part of the U.S. policy response to the subprime mortgage crisis--to take a difference-in-differences approach. Comparing exempt and non-exempt bank lending behavior I find that the rule reduced access to mortgage credit in high self-employment census tracts. I then use geographic variation in access to banks receiving an exemption to identify broader economic effects. Growth in self-employment was lower in areas where exempt banks had a smaller market share. Locations farther from exempt branches experienced a relative reduction in new small business employment as a percentage of total employment.
- G1 - General Financial Markets
- D1 - Household Behavior and Family Economics