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Mortgages I

Paper Session

Friday, Jan. 5, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Washington C
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Chester Spatt, Carnegie Mellon University and Massachusetts Institute of Technology

Time to Homeownership and Mortgage Design: Income Sharing and Saving Incentive

Gianluca Marcato
,
University of Reading
Rafal Wojakowski
,
University of Surrey

Abstract

Accessibility to homeownership in western countries, especially for middle to low income earners has decreased over time due to several factors such as stringent covenants, pressure of rental growth on household income expenditure and a negative gap between wage and house price growth. Moreover, young households face higher accumulated student loans and, in a steadily rising and strong rental market, they are not able to generate enough savings to cover the initial deposit necessary to become homeowners. We design an income sharing mortgage product where borrowers accept to pledge a portion of their future income to anticipate the time necessary to become homeowners by obtaining a higher LTV (up to 100%). Our analysis finds that this mortgage may be useful for lower income households in periods of higher uncertainty and that it may become less expensive in a high interest rate environment. Finally, this product also embeds an incentive to save, with potential benefits for the overall systemic risk of the banking sector. As a consequence we find that the default risk is not higher than a plain vanilla mortgage with lower LTV.

The Effect of Changing Mortgage Payments on Default and Prepayment: Evidence From HAMP Resets

Therese Scharlemann
,
U.S. Treasury Department
Stephen Shore
,
Georgia State University

Abstract

The Home Affordable Modification Program (HAMP) is a government-sponsored program to reduce the monthly mortgage payments of borrowers who are in danger of default. After five years of below-market interest rates, HAMP interest rates jump predictably, increasing annually in increments of up to one percentage point until they reach a pre-determined market rate. We identify the causal effect of increasing interest rates (and with them, monthly payments) on default (as well as on delinquency transitions and prepayment) with an event study design, comparing default rates immediately before and after rate reset times for loans that do and do not reset. Since the size of the interest rate reset is a kinked function of the difference between the subsidized interest rate and the market interest rate, we also identify the effect using a regression kink design (RKD). We find that a one percentage point rate increase leads to a roughly 20 percent increase in the default hazard (e.g., from 0.6 percent per month to 0.72 percent per month). The one percentage point rate change we study has a similar default-reducing effect as principal reduction in HAMP's Principal Reduction Alternative (as estimated by Scharlemann and Shore (2016)), but reduces default at much lower cost.

The Effect of Interest Rates on Home Buying: Evidence From a Discontinuity in Mortgage Insurance Premiums

Neil Bhutta
,
Federal Reserve Board
Daniel Ringo
,
Federal Reserve Board

Abstract

Regression discontinuity estimates indicate that home buying is highly responsive to interest rates in a large segment of the population. A surprise 50 basis point cut in the effective interest rate for mortgages insured by the Federal Housing Administration (FHA) led to an immediate 14 percent increase in home buying among the FHA-reliant population. The effect of the rate cut holds across regions with varying economic conditions. Higher income households show far less sensitivity to rates, which has important implications for other stimulus policies.

Liquidity Provision, Credit Risk and the Bond Spread: New Evidence From the Subprime Mortgage Market

Timothy Riddiough
,
University of Wisconsin-Madison
Xudong An
,
Federal Reserve Bank of Philadelphia

Abstract

We study the determinants of the subprime mortgage loan spread, with a particular focus on funding liquidity and default-liquidity interaction effects. We find that sector-level as well as macro funding liquidity provision affected subprime loan rates, explaining a significant portion of the variation in spreads. Liquidity conditions just prior to loan default mattered, indicating destabilizing liquidity-driven default effects. A reduction in macro funding liquidity provision at the time of loan origination predicts worsening credit performance, implying a stabilizing default-driven liquidity component in the loan spread. Positive default-liquidity feedback (spiraling) effects are also documented.
Discussant(s)
Joao Cocco
,
London Business School
Tomasz Piskorski
,
Columbia University
Manuel Adelino
,
Duke University
Burton Hollifield
,
Carnegie Mellon University
JEL Classifications
  • G2 - Financial Institutions and Services
  • K2 - Regulation and Business Law