Essays on mortgage choice and housing economics

This dissertation consists of three self-contained chapters that study various interactions between the housing market, mortgage choice, and public policy. The first chapter studies how changes to the collateral value of real estate assets affect homeowner borrowing. While previous research has documented a positive relationship between house prices and home-equity based borrowing, a key empirical challenge has been to disentangle the role of collateral constraints from that of wealth effects in generating this relationship. To isolate the role of collateral constraints, I exploit the fully anticipated expiration of resale price controls created through an inclusionary zoning regulation in Montgomery County, Maryland. I estimate that the marginal propensity to borrow out of increases in housing collateral is between $0.04 and$0.13. The magnitude of this effect is correlated with a homeowner\u27s initial leverage and additional analysis of residential investment and ex-post loan performance further suggests that borrowers used some portion of the extracted funds to finance current consumption and investment expenditures. These results highlight the importance of collateral constraints for homeowner borrowing and suggest a potentially important role for house price growth in driving aggregate consumption. The second chapter, co-authored with Andrew Paciorek, provides novel estimates of the interest rate elasticity of mortgage demand by measuring the extent to which households bunch at a discrete jump in interest rates generated by the conforming loan limit. Our estimates imply that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent. The third chapter, co-authored with Joseph Gyourko, Fernando Ferreira, and Wenjie Ding, uses extensive micro data to investigate whether contagion was an important factor in the last housing cycle. Our estimates provide evidence of contagion during the housing boom, but not during the bust. We also find that contagion effects are greater when transmitted from a larger to a smaller market, and are more important for the most elastically-supplied markets. Local fundamentals and expectations of future fundamentals have limited ability to account for our estimated effect

The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

This paper provides novel estimates of the interest rate elasticity of mortgage demand by measuring the degree of bunching in response to a discrete jump in interest rates at the conforming loan limit—the maximum loan size eligible for purchase by Fannie Mae and Freddie Mac. The estimates indicate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. One-third of this response is driven by borrowers who take out second mortgages, which implies that total mortgage debt only declines by 1.5 to 2 percent. (JEL D14, G21, R21, R31) </jats:p

The Interest Rate Elasticity of Mortgage Demand: Evidence from Bunching at the Conforming Loan Limit

The relationship between the mortgage interest rate and a household&amp;#x27;s demand for mortgage debt has important implications for a host of public policy questions. In this paper, we use detailed data on over 2.7 million mortgages to provide novel estimates of the interest rate elasticity of mortgage demand. Our empirical strategy exploits a discrete jump in interest rates generated by the conforming loan limit--the maximum loan size eligible for securitization by Fannie Mae and Freddie Mac. This discontinuity creates a large ``notch in the intertemporal budget constraint of prospective mortgage borrowers, allowing us to identify the causal link between interest rates and mortgage demand by measuring the extent to which loan amounts bunch at the conforming limit. Under our preferred specifications, we estimate that a 1 percentage point increase in the rate on a 30-year fixed-rate mortgage reduces first mortgage demand by between 2 and 3 percent. We also present evidence that about one third of the response is driven by borrowers who take out second mortgages while leaving their total mortgage balance unchanged. Accounting for these borrowers suggests a reduction in total mortgage debt of between 1.5 and 2 percent per percentage point increase in the interest rate. Using these estimates, we predict the changes in mortgage demand implied by past and proposed future increases to the guarantee fees charged by Fannie and Freddie. We conclude that these increases would directly reduce the dollar volume of new mortgage originations by well under 1 percent.</jats:p

Regulating Household Leverage

AbstractThis article studies how credit markets respond to policy constraints on household leverage. Exploiting a sharp policy-induced discontinuity in the cost of originating certain high-leverage mortgages, we study how the Dodd–Frank “Ability-to-Repay” rule affected the price and availability of credit in the U.S. mortgage market. Our estimates show that the policy had only moderate effects on prices, increasing interest rates on affected loans by 10–15 basis points. The effect on quantities, however, was significantly larger; we estimate that the policy eliminated 15% of the affected market completely and reduced leverage for another 20% of remaining borrowers. This reduction in quantities is much greater than would be implied by plausible demand elasticities and indicates that lenders responded to the policy not only by raising prices but also by exiting the regulated portion of the market. Heterogeneity in the quantity response across lenders suggests that agency costs may have been one particularly important market friction contributing to the large overall effect as the fall in lending was substantially larger among lenders relying on third-parties to originate loans. Finally, while the policy succeeded in reducing leverage, our estimates suggest this effect would have only slightly reduced aggregate default rates during the housing crisis.</jats:p

Measuring the welfare cost of asymmetric information in consumer credit markets

Information asymmetries are known in theory to lead to inefficiently low credit provision, yet empirical estimates of the resulting welfare losses are scarce. This paper leverages a randomized experiment conducted by a large fintech lender to estimate welfare losses arising from asymmetric information in the market for online consumer credit. Building on methods from the insurance literature, we show how exogenous variation in interest rates can be used to estimate borrower demand and lender cost curves and recover implied welfare losses. While asymmetric information generates large equilibrium price distortions, we find only small overall welfare losses, particularly for high-credit-score borrowers