Real Estate and Housing Finance
Friday, Jan. 3, 2020 12:30 PM - 2:15 PM (PDT)
- Chair: Timothy McQuade, Stanford University
Concentration in Mortgage Markets: GSE Exposure and Risk Taking in Uncertain Times
AbstractWhen home prices threaten to decline, lenders bearing more of a community's
mortgage risk have an incentive to combat this decline with new lending that boosts
demand. We test whether this incentive drove the government-sponsored enterprises
(GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines
grew from small to signicant. To identify the effect we relate new risky lending to
regional variation in the GSEs' exposure, and the interaction of this variation with
home-price elasticity. We focus on the GSEs' discretion across potential purchases by
reference to the credit-score threshold that triggers manual underwriting. We conclude
that this incentive helps explain the GSEs' expansion of risky lending shortly before
the Financial crisis.
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the United States Housing Boom
AbstractAn expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002--2006 U.S. house price boom. By contrast, we document a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that higher house price appreciation lowered the transition rate into first-time homeownership for subprime individuals. Finally, the paper documents that subprime borrowers did not play a significant role in the increased speculative activity and underwriting fraud that the literature has linked directly to the housing boom. Taken together, these results are more consistent with subprime borrowers being priced out of housing boom markets rather than inflating prices in those markets.
Paying Too Much? Price Dispersion in the US Mortgage Market
AbstractWe document wide dispersion in the mortgage rates that households pay on identical loans, and assess the role of financial knowledge and shopping in the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that identical borrowers obtain for the same loan, in the same market, on the same day, of 53 basis points — equivalent to about $6,750 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer, suggesting an important role for financial knowledge and negotiation. Comparing the rates consumers obtain to the real-time distribution of rates that lenders could offer for the same loan and borrower type, we find that borrowers who are likely to be the least financially savvy tend to substantially overpay relative to the rates available in the market. The spread between obtained rates and available rates narrows when overall market interest rates rise, suggesting that a rising level of borrowing costs encourages more search and negotiation. Survey data provide direct evidence that shopping and financial knowledge help determine the mortgage rates borrowers get, and that shopping activity rises with the level of rates.
- G2 - Financial Institutions and Services
- D1 - Household Behavior and Family Economics