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  2. ASSA Annual Meeting
  3. 2025
  4. Program
  5. Mortgage Markets: Risk, Access, and Transparency
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Mortgage Markets: Risk, Access, and Transparency

Paper Session

Saturday, Jan. 4, 2025 2:30 PM - 4:30 PM (PST)

San Francisco Marriott Marquis, Yerba Buena Salon 12 & 13
Hosted By: American Finance Association
  • Vicki Bogan, Duke University

When Insurers Exit: Climate Losses, Fragile Insurers, and Mortgage Markets

Parinitha Sastry
,
Columbia University
Ishita Sen
,
Harvard University
Ana-maria Tenekedjieva
,
Federal Reserve Board

Abstract

This paper studies how homeowners insurance markets respond to growing climate losses and how this impacts mortgage market dynamics. Using Florida as a case study, we show that traditional insurers are exiting high risk areas, and new lower quality insurers are entering and filling the gap. These new insurers service the riskiest areas, are less diversified, hold less capital, and 20 percent of them become insolvent. We trace their growth to a lax insurance regulatory environment. Yet, despite their low quality, these insurers secure high financial stability ratings, not from traditional rating agencies, but from emerging rating agencies. Importantly, these ratings are high enough to meet the minimum rating requirements set by the government-sponsored enterprises (GSEs). We find that these new insurers would not meet GSE eligibility thresholds if subjected to traditional rating agencies’ methodologies. We then examine the implications of these dynamics for mortgage markets. We show that lenders respond to the decline in insurance quality by selling a large portion of exposed loans to the GSEs. We quantify the counterparty risk by examining the surge in serious delinquencies and foreclosure around the landfall of Hurricane Irma. Our results show that the GSEs bear a large share of insurance counterparty risk, which is driven by their mis-calibrated insurer eligibility requirements and lax insurance regulation.

Dual Credit Markets: Income Risk, Household Debt, and Consumption

David Matsa
,
Northwestern University
Brian Melzer
,
Dartmouth College
Michal Zator
,
University of Notre Dame

Abstract

Many young employees work on a temporary basis, which entails significantly greater income risk than “permanent” work, even for jobs in the same occupation and at a similar wage. We find that this income uncertainty leads lenders to ration credit to temporary workers, precisely at the stage of life when permanent workers rely on mortgages to invest in housing and loans to smooth consumption and purchase durable goods. Labor laws that improve job security for permanent workers create a dual credit market alongside the dual labor market, making it harder for young adults to establish financial independence and new families.

Financial Skills and Search in the Mortgage Market

Marta Cota
,
Nova School of Business and Economics
Ante Sterc
,
Bank of Portugal and Nova School of Business and Economics

Abstract

This paper explores how financial literacy influences household mortgage decisions through a structural model of mortgage search. Unlike existing literature on financial literacy and investment, we introduce a new channel—mortgage debt choice via search effort. Using a unique U.S. dataset combining detailed mortgage data with financial literacy measures, we find that households with lower financial literacy are 4\% less likely to engage in mortgage search, locking in mortgage rates 33 basis points higher, leading to annual overpayments of at least \$580. They are also 11 percentage points less likely to refinance and less likely to switch lenders. We model individual search effort and financial skill investment, showing that skill differences contribute to consumption inequality via mortgage repayments. Our findings suggest that (i) higher mortgage access increases delinquency risks for less financially skilled households, (ii) targeted financial education can reduce these risks, and (iii) low mortgage rates mainly benefit financially literate households through refinancing. Lastly, we show that easier mortgage access reinforces financial skill accumulation, implying that targeted policies may be more effective today than in the past.

Does the Disclosure of Consumer Complaints Reduce Racial Disparities in the Mortgage Lending Market

Xiang Li
,
Fordham University

Abstract

The Consumer Financial Protection Bureau (CFPB) publicly disclosed consumer complaint narratives in 2015. Utilizing a difference-in-differences design, I find that, following disclosure, CFPB-supervised banks whose complaint narratives are disclosed are less prone to discriminate against minority borrowers in the mortgage lending market. This reduces racial disparities in interest rates, default rates, and rejection rates. The disclosure saves minority borrowers $102 million in interest payments and aids over 14,000 minority households in securing loans annually, thereby narrowing the racial gap in homeownership. Stakeholders including consumers, peer banks, and stock market investors facilitate the disclosure’s effects on reducing discrimination.

Discussant(s)
Jawad Addoum
,
Cornell University
Michaela Pagel
,
Washington University in St. Louis
Sheisha Kulkarni
,
University of Virginia
Feng Liu
,
Consumer Financial Protection Bureau
JEL Classifications
  • G2 - Financial Institutions and Services