Mortgage Refinance and Mortgage Stress
Friday, Jan. 6, 2023 8:00 AM - 10:00 AM (CST)
- Chair: Rodney Ramcharan, University of Southern California
More Tax, Less Refi? The Mortgage Interest Deduction and Monetary Policy Pass-Through
AbstractWe study how fiscal policy affects the transmission of monetary policy using the Tax Cuts and Jobs Act (TCJA) of 2017 as a natural experiment. The TCJA capped deductions for state and local taxes, (SALT), and increased the standard deduction, causing many households to switch from itemizing to taking the standard deduction. Households that stopped deducting mortgage interest increased their after-tax mortgage rate, increasing both their refinance incentive and the return to accelerating their balance payoff. Using a difference-in-differences design with a novel method for inferring a loan's itemizing status, we compare the refinance and debt paydown behavior of households that likely stopped itemizing. We find that for households who stopped itemizing, the TCJA increased the refinance probability conditional on refinance incentive. The law change had no detectable effect on deleveraging for borrowers' existing mortgage through reduced cash-out refinancing, increased cash-in refinancing, or accelerated paydown.
Quick on the Draw: Line Adjustment and Draw Behavior in Failing Banks
AbstractUsing a proprietary set of transaction-level HELOC data from five banks, we explore whether banks actively manage HELOCs for periods prior to and during bank distress. Banks are more likely to revoke credit lines that exhibit potentially problematic characteristics at origination and time-varying borrower “early warning signals” of risk. In the three months before each bank’s staggered failure date, when bank capital constraints and incentives to strategically deploy that capital increase, our findings grow in magnitude. In contrast, during this time, we find that, on average, borrowers do not increase HELOC drawdown rates. The existing literature focuses on how bank relationships can be valuable during periods of economic or borrower stress. To our knowledge, we are the first paper to examine the value of lending as well as deposit relationships during bank stress. Before the bank becomes distressed, we find that existing relationships have no adverse effects on banks’ decision to revoke credit. As failure approaches, however, borrowers with other lending relationships are more likely to have their HELOCs cut, suggesting that lending relationships do not benefit borrowers during times of bank stress. We contribute to a growing literature that explores how contractions in the supply of credit and deteriorating bank financial health affect bank and borrower behavior.
Targeted Principal Forgiveness Is Effective: Mortgage Modification and Financial Crisis
AbstractResearch into the Global Financial Crisis finds forgiving mortgage principal ineffective at stemming defaults, and argues that borrowers default because of illiquidity, not strategically. We argue the opposite: targeted forgiveness is effective, and default is better explained by quantifying how illiquidity interacts with borrowers’ strategy. We embed these interactions in a computational heterogeneous structural model, introducing idiosyncratic default penalties. Differing penalties explain borrowers’ differing deviations from pure-financial optimality. We run the model on heterogeneous microdata, estimating penalties from credit scores and payment histories. Forgiving low-score, deep-underwater borrowers would have eliminated nearly all their defaults, with net gain for lenders.
- G2 - Financial Institutions and Services