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Mortgage Borrower Behavior
Friday, Jan. 7, 2022
10:00 AM - 12:00 PM (EST)
American Real Estate and Urban Economics Association
Massachusetts Institute of Technology
The Impact of Crisis-Period Interest Rate Declines on Distressed Borrowers
We measure the causal impact of reductions in benchmark interest rates on the renegotiation and performance of distressed loans, using 2000s subprime mortgages as a laboratory. Subprime borrowers treated with larger benchmark interest rate declines benefited from increased debt-renegotiation probabilities and lower debt-service payments. The estimated effects are similar across both current borrowers and those in default. Renegotiation of mortgage debt also reduced foreclosures over the longer term. However, following debt-renegotiation, surviving treated borrowers re-entered and lingered in serious delinquency. Findings suggest that while monetary policy may effect reductions in benchmark rates and spur debt-renegotiation, such interventions may not lead to longer-run curative outcomes.
The Cost of Consumer Collateral: Evidence from Bunching
We show that borrowers are highly sensitive to the requirement of posting their homes as collateral. Using administrative loan application and performance data from the U.S.\ Federal Disaster Loan Program, we exploit a loan amount threshold above which households must post their residence as collateral. One-third of all borrowers select the maximum uncollateralized loan amount, and our bunching estimates suggest that the average borrower is willing to give up 30% of their loan amount to avoid collateral. Exploiting time variation in the loan amount threshold, we find that collateral causally reduces default rates by 35%. Our results help to explain high perceived default costs in the mortgage market, and uniquely quantify the extent to which collateral reduces moral hazard in consumer credit markets.
What Triggers Mortgage Default? New Evidence from Linked Administrative and Survey Data
Why do homeowners default on mortgages? The answer is still unclear because researchers typically observe only a limited subset of the shocks that might trigger default. This paper addresses the question using a survey specifically designed for the purpose, with a sample drawn from (and matched to) a very rich administrative dataset. I find that a wide variety of typically-unobserved liquidity shocks – including not only job loss but also health shocks, divorce, increases in required mortgage payments, other expense shocks, etc. – together trigger nearly all defaults. Thus “strategic” default with no liquidity trigger is much less common than it usually appears. Conversely, even in this uniquely rich data, the percent of defaults triggered by negative equity is close to previous estimates and much lower than researchers seem to have expected. Thus many defaults are not triggered by negative home equity, contrary to the predictions of the most popular models in the literature.
The Consumption Response to Borrowing Constraints in the Mortgage Market
This paper studies how the housing market and household consumption respond to a relaxation of borrowing constraints in the mortgage market. We focus on a large-scale UK policy initiative called Help-to-Buy (HTB), which effectively loosened down payment constraints by facilitating home purchases with only a five percent down payment. Our research design exploits geographic variation in exposure to HTB and uses administrative data on mortgages and car sales in combination with household survey data. We estimate that the program increased total home purchases by 10 percent and especially affected young buyers. Regions more exposed to the program experienced an increase in home-related expenditure, non-durable consumption and loan-financed car purchases. Our results point towards a new channel through which borrowing constraints in the mortgage market affect household consumption that is not driven by house prices or home-related expenditure.
New York University
Brigham Young University
University of Chicago