Market-based loss mitigation practices for troubled mortgages following the financial crisis
The meltdown in residential real-estate prices that commenced in 2006 resulted in unprecedented mortgage delinquency rates. Until mid-2009, lenders and servicers pursued their own individual loss mitigation practices without being significantly influenced by government intervention. Using a unique dataset that precisely identifies loss mitigation actions, we study these methods?liquidation, repayment plans, loan modification, and refinancing?and analyze their effectiveness. We show that the majority of delinquent mortgages do not enter any loss mitigation program or become a part of foreclosure proceedings within 6 months of becoming distressed. We also find that it takes longer to complete foreclosures over time, potentially due to congestion. We further document large heterogeneity in practices across servicers, which is not accounted for by differences in borrower population. ; Consistent with the idea that securitization induces agency conflicts, we confirm that the likelihood of modification of securitized loans is up to 70% lower relative to portfolio loans. Finally, we find evidence that affordability (as opposed to strategic default due to negative equity) is the prime reason for redefault following modifications. While modification terms are more favorable for weaker borrowers, greater reductions in mortgage payments and/or interest rates are associated with lower redefault rates. Our regression estimates suggest that a 1 percentage point decline in mortgage interest rate is associated with a nearly 4 percentage point decline in default probability. This finding is consistent with the Home Affordable Modification Program (HAMP) focus on improving mortgage affordability.
AUTHORS: Agarwal, Sumit; Evanoff, Douglas D.; Chomsisengphet, Souphala; Amromin, Eugene; Ben-David, Itzhak
Transforming payment choices by doubling fees on the Illinois tollway
Rising traffic congestion and the need to improve operational efficiency prompted the Illinois Tollway Authority to unveil plans to reconfigure its road network for ?stop-free? electronic toll collection. Committing to an extensive construction program would have required the Tollway to ensure that enough drivers had electronic payment devices (branded as I- PASS). Conversely, without reconfigured toll gates the drivers would have had less reason to own an I-PASS. To resolve this potentially thorny chicken-and-egg problem, the Tollway put in place a new I-PASS distribution network and then dramatically raised the price for cash toll payments. This paper focuses on consumer response to the change in relative prices. Using tollway traffic data, we document a substantial aggregate increase in electronic toll payments. The propensity to pay electronically rose uniformly throughout the day, reflecting the effectiveness of the Tollway?s actions in modifying behavior of both commuters and leisure drivers. ; However, not all drivers appear to have responded to the price change per se. To analyze the relative importance of price, income, and fixed participation costs we use the Census tract level data on employment and residential location to construct a ZIP-code measure of the likelihood of commuting to work via the tollway. Conditional on this measure, we show that the adoption of electronic payments among lower-income households was indeed influenced by the price change. In contrast, high- and medium-income households responded to lower fixed costs of obtaining I-PASS at conveniently located supermarkets. Finally, we document the role of social network relationships, as changes in I-PASS ownership for all income groups were strongly affected by I-PASS use among neighbors and co- workers.
AUTHORS: Jankowski, Carrie; Porter, Richard D.; Amromin, Eugene
How did the 2003 dividend tax cut affect stock prices?
We test the hypothesis that the 2003 dividend tax cut boosted U.S. stock prices and thus lowered the cost of equity. Using an event- study methodology, we attempt to identify an aggregate stock market effect by comparing the behavior of U.S. common stock prices to that of European stocks and real estate investment trusts. We also examine the relative cross-sectional response of prices on high-dividend versus low-dividend paying stocks. We do not find any imprint of the dividend tax cut news on the value of the aggregate U.S. stock market. On the other hand, high-dividend stocks outperformed low-dividend stocks by a few percentage points over the event windows, suggesting that the tax cut did induce asset reallocation within equity portfolios. Finally, the positive abnormal returns on non-dividend paying U.S. stocks in 2003 do not appear to be tied to tax-cut news.
AUTHORS: Sharpe, Steven A.; Harrison, Paul; Amromin, Eugene
The role of securitization in mortgage renegotiation
We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rates by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans.
AUTHORS: Chomsisengphet, Souphala; Ben-David, Itzhak; Agarwal, Sumit; Amromin, Eugene; Evanoff, Douglas D.
Access to Refinancing and Mortgage Interest Rates: HARPing on the Importance of Competition
We explore a policy-induced change in borrower ability to shop for mortgages to investigate whether market competitiveness affects mortgage interest rates. Our paper exploits a discontinuity in the competitive landscape introduced by the Home Affordable Refinancing Program (HARP). Under HARP, lenders that currently service loans eligible for refinancing enjoyed substantial advantages over their potential competitors. Using a fuzzy regression discontinuity design, we show a jump in mortgage interest rates precisely at the HARP eligibility threshold. Our results suggest that limiting competition raised interest rates on 30-year fixed-rate mortgages by 15 to 20 basis points, translating into higher lender profits. The results are distinct from documented effects of consolidation and capacity reduction in mortgage lending and are robust to a number of sample restrictions and estimation choices. We interpret our findings as evidence that increases in pricing power lead to higher interest rates in mortgage markets.
AUTHORS: Amromin, Eugene; Kearns, Caitlin
The tradeoff between mortgage prepayments and tax-deferred retirement savings
We show that a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax- deferred accounts (TDA). Using data from the Survey of Consumer Finances, we show that about 38% of U.S. households that are accelerating their mortgage payments instead of saving in tax-deferred accounts are making the wrong choice. For these households, reallocating their savings can yield a mean benefit of 11 to 17 cents per dollar, depending on the choice of investment assets in the TDA. ; In the aggregate, these misallocated savings are costing U.S. households as much as 1.5 billion dollars per year. Finally, we show empirically that this inefficient behavior is unlikely to be driven by liquidity considerations or other constraints, and that self-reported debt aversion and risk aversion variables explain to some extent the preference for paying off debt obligations early and hence the propensity to forgo our proposed tax arbitrage.
AUTHORS: Amromin, Eugene; Huang, Jennifer; Sialm, Clemens
From the horse’s mouth: how do investor expectations of risk and return vary with economic conditions?
Data obtained from monthly Gallup/UBS surveys from 1998-2007 and from a special supplement to the Michigan Surveys of Consumer Attitudes, run in 22 monthly surveys between 2000-2005, are used to analyze stock market beliefs and portfolio choices of household investors. We show that the key variables found to be positive predictors of actual stock returns in the asset-pricing literature are also highly correlated with investor?s reported expected returns, but with the opposite sign. Moreover, analysis of the micro data indicates that expectations of both risk and returns on stocks are strongly influenced by perceptions of economic conditions. ; In particular, when investors believe macroeconomic conditions are more expansionary, they tend to expect both higher returns and lower volatility. This is difficult to reconcile with the canonical view that expected returns on stocks rise during recessions to compensate household investors for increased exposure or sensitivity to macroeconomic risks. Finally, the relevance of these investors? reported expectations is supported by the finding of a significant link between their expectations and portfolio choices. In particular, we show that portfolio equity positions tend to be higher for those respondents that anticipate higher expected returns or lower uncertainty.
AUTHORS: Amromin, Eugene; Sharpe, Steven A.
Household Inequality and the Consumption Response to Aggregate Real Shocks
The drop in output and consumption that occurred during the Great Recession has been large and prolonged. Figure 1 displays per capita U.S. real gross domestic product (GDP) and personal consumption expenditures (PCE) between 1985 and 2016 and highlights the large drop in both consumption and output that occurred starting in 2007 and its parallel shift compared with the previous trend. In this article, we ask why consumption has dropped so much and has been recovering so slowly. We also ask to what extent household inequality before and after the Great Recession interacted with the recession itself to generate such a large and persistent drop in consumption.
AUTHORS: Amromin, Eugene; Schulze, Karl; De Nardi, Mariacristina
Economic Perspectives special issue on payments fraud: an introduction
This article provides an overview of this special issue of Economic Perspectives, which presents selected papers based on the proceedings of the Federal Reserve Bank of Chicago's eighth annual Payments Conference, Payments Fraud: Perception Versus Reality, held on June 5?6, 2008.
AUTHORS: Amromin, Eugene; Porter, Richard D.
Transforming payment choices by doubling fees on the Illinois Tollway
Using data from the Illinois Tollway, the authors study the effectiveness of a particular application of pricing incentives, in conjunction with a mass-marketing campaign, to foster adoption of electronic toll collection. Dissecting the consumer response by income level, the authors reveal interesting heterogeneity of consumer payment choice in this environment.
AUTHORS: Amromin, Eugene; Jankowski, Carrie; Porter, Richard D.