« Back to Results
Mortgage Borrower Behavior
Friday, Jan. 7, 2022
10:00 AM - 12:00 PM (EST)
American Real Estate and Urban Economics Association
Chair: Daniel Greenwald,
Massachusetts Institute of Technology
The Impact of Interest Rate Declines on Distressed Borrowers: Evidence from the 2000s Housing Bust
We measure the causal impact of falling benchmark interest rates on distressed borrowers, using subprime mortgage borrowers during the 2000s housing bust as a laboratory. Borrowers treated with larger benchmark interest rate reductions benefit from increased debt-renegotiation probabilities and lower debt-service payments of nearly$500 per borrower per month, with equally efficacious effects for current and delinquent borrowers. These interest rate decline-induced debt-renegotiations also reduce foreclosures over the longer term. However, following debt-renegotiation, surviving treated borrowers eventually re-enter and linger in serious delinquency. Hence, findings suggest that policies affecting interest rate induced debt-renegotiations 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
What triggers mortgage default? Good data to answer this question is rare, so the relative importance of negative equity and adverse shocks in triggering mortgage default remains deeply unclear; Foote and Willen (2018) call it one of two ""central"" questions in the literature. This paper leverages a unique match between a very rich administrative mortgage dataset and a survey specifically designed to determine the triggers of default. I find that other datasets with less information on adverse shocks appear to systematically underestimate their frequency and intensity. Adverse liquidity shocks trigger nearly all defaults; many of these shocks are not unemployment or even a drop in income, and so will be missed by most existing studies. In contrast, the uniquely rich data used in this paper confirms findings from other datasets that many defaults are not triggered by negative 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