Giving credit where credit is due? the Community Reinvestment Act and mortgage lending in lower-income neighborhoods
I identify and quantify the mortgage supply effect of the Community Reinvestment Act (CRA), a law mandating that banks help provide credit in lower-income neighborhoods, by exploiting a discontinuity in the selection rule determining which census tracts CRA targets. Using a comprehensive source of micro data on MSA mortgage applications, I find that CRA affects bank lending primarily in large MSA's, where banks are most scrutinized. The analysis indicates that CRA's effect on bank originations was about 4% between 1994 and 1996, and expanded to 8% in 1997-2002, consistent with the timing of a reform strengthening CRA. I provide some evidence that marginal loans go to atypical, potentially higher-risk borrowers. The results also indicate net "crowd-in": lending to targeted tracts by unregulated institutions rises in post-reform years, in particular to those areas that have had relatively low home purchase volume in the recent past, consistent with a model of information externalities in credit markets. Finally, using changes in tract eligibility status following the release of Census 2000 data as an additional source of variation, I find that CRA increased bank lending to newly targeted tracts in large MSA's by 4-5% in 2004 and 2005.
AUTHORS: Bhutta, Neil
Money in the Bank? Assessing Families' Liquid Savings using the Survey of Consumer Finances
We estimate that sixty percent of American families have liquid savings of less than three months of their own expenses, and nearly one-quarter have less than $400. In this Note we use data from the Federal Reserve Board's triennial Survey of Consumer Finances (SCF) to directly assess American families' liquid savings.
AUTHORS: Bhutta, Neil; Dettling, Lisa J.
The depth of negative equity and mortgage default decisions
A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home's value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the "double-trigger" theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.
AUTHORS: Shan, Hui; Bhutta, Neil; Dokko, Jane K.
Regression discontinuity estimates of the effects of the GSE act of 1992
In this paper I estimate the effect of the Underserved Areas Goal (UAG) established under the ?GSE Act?, a 1992 law mandating that the housing government-sponsored enterprises Fannie Mae and Freddie Mac help promote credit access and homeownership opportunities for low-income households and in low-income and minority neighborhoods. I identify the goal?s impact by taking advantage of a discontinuity in the census tract eligibility rule. Employing local linear and non-parametric regression discontinuity methods, I find that this goal has had a direct effect on GSE purchasing activity of 3-4% and increases overall GSE-eligible originations by 2-3% on average at the cutoff between 1997 and 2002. Changing eligibility status following the release of Census 2000 data provides another source of variation to identify the UAG?s effect in 2005 and 2006, years of sharply increasing goals levels and years which have contributed heavily to current credit losses. I find that while the UAG affected GSE behavior in 2005 and 2006, GSE risk avoidance limited their response. Unlike previous research, I find no evidence that UAG-induced increases in GSE credit supply crowds-out FHA and subprime lending.
AUTHORS: Bhutta, Neil
The ins and outs of mortgage debt during the housing boom and bust
From 1999 to 2013, U.S. mortgage debt doubled and then contracted sharply. Our understanding of the factors driving this volatility in the stock of debt is hampered by a lack of data on mortgage flows. Using comprehensive, individual-level panel data on consumer liabilities, I estimate detailed mortgage inflows and outflows. During the boom, inflows from real estate investors tripled, far outpacing growth from other segments such as first-time homebuyers. During the bust, although defaults and deleveraging are popular explanations for the debt decline, a collapse in inflows has been the major driver. Inflow declines across counties have been associated not just with house price declines, but also with rising unemployment and higher minority population shares. Finally, inflow declines reflect, in part, a dramatic decline in first-time homebuying. First-time homebuying fell among both high and low credit score individuals, but much more precipitously for low score individuals. Further analysis suggests that the differential decline by credit score likely reflects markedly tightened credit supply.
AUTHORS: Bhutta, Neil
The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums
We study the effect of interest rates on the housing market by taking advantage of a sudden and unexpected price change in a large government mortgage program. The Federal Housing Administration (FHA) insures most mortgages to lower-downpayment, lower credit score borrowers, including a majority of first-time homebuyers. The FHA charges borrowers an annual mortgage insurance premium (MIP), and in January, 2015 the FHA abruptly reduced the MIP, and thus FHA borrowers? effective interest rate, by 50 basis points. Using a regression discontinuity design, we find that the MIP reduction increased the number of home purchase originations among the FHA-reliant population by nearly 14 percent. The response to the premium cut was negatively correlated with borrower income, with no observable response among relatively high income borrowers. We trace part of the jump in home buying to the MIP reduction helping ease binding debt payment-to-income ratio limits thus allowing more applications to be approved. Finally, we find no evidence that the MIP reduction increased house prices.
AUTHORS: Bhutta, Neil; Ringo, Daniel R.
Stress Testing Household Debt
We estimate a county-level model of household delinquency and use it to conduct "stress tests" of household debt. Applying house price and unemployment rate shocks from Comprehensive Capital Analysis Review (CCAR) stress tests, we find that forecasted delinquency rates for the recent stock of debt are moderately lower than for the stock of debt before the 2007-09 financial crisis, given the same set of shocks. This decline in expected delinquency rates under stress reflects an improvement in debt-to-income ratios and an increase in the share of debt held by borrowers with relatively high credit scores. Under an alternative scenario where the size of house price shocks depends on housing valuations, we forecast a much lower delinquency rate than occurred during the crisis, reflecting more reasonable housing valuations than pre-crisis. Stress tests using other scenarios for the path of house prices and unemployment also support the conclusion that household debt curren tly poses a lower risk to financial stability than before the financial crisis.
AUTHORS: Bhutta, Neil; Bricker, Jesse; Dettling, Lisa J.; Kelliher, Jimmy; Laufer, Steven
Mortgage debt and household deleveraging: accounting for the decline in mortgage debt using consumer credit record data
One of the major reasons hypothesized for the tepid economic recovery thus far is the ongoing "deleveraging" process. From 2009:Q3 to 2011:Q3, aggregate household debt declined by about $1.5 trillion in real terms, with mortgage debt falling by about $1 trillion. Other than defaults, the factors driving the decline in aggregate debt are not precisely understood, in large part because the necessary data are not widely available. This paper draws on panel data consisting of individual credit records to better understand why mortgage debt has declined. I decompose changes in aggregate mortgage debt over two-year periods spanning the past decade into inflows (from individuals whose mortgage debt increases during a given two-year period) and outflows (from those who reduce or eliminate their mortgage debt over a period). The principal finding is that the drop in outstanding mortgage debt has more to do with shrinking inflows than with expanding outflows, including defaults. Even if outflows had not grown at all, mortgage debt would have declined over the past two years because inflows have been so weak. One factor dampening inflows is historically weak first-time homebuying, especially among those with less-than-excellent credit scores, suggesting tight credit supply has limited debt accumulation even among those who have little debt. On the outflows side, most of the expansion can be traced to financially distressed borrowers and mortgage defaults, with real estate investors playing a disproportionate role. Otherwise, there has not been much of an increase in outflows, implying that borrowers generally are not paying down their balances more aggressively than in the past.
AUTHORS: Bhutta, Neil
Payday loans and consumer financial health
The annualized interest rate for a payday loan often exceeds 10 times that of a typical credit card, yet this market grew immensely in the 1990s and 2000s, elevating concerns about the risk payday loans pose to consumers and whether payday lenders target minority neighborhoods. This paper employs individual credit record data, and Census data on payday lender store locations, to assess these concerns. Taking advantage of several state law changes since 2006 and, following previous work, within-state-year differences in access arising from proximity to states that allow payday loans, I find little to no effect of payday loans on credit scores, new delinquencies, or the likelihood of overdrawing credit lines. The analysis also indicates that neighborhood racial composition has little influence on payday lender store locations conditional on income, wealth and demographic characteristics.
AUTHORS: Bhutta, Neil
The 2008 HMDA data: the mortgage market during a turbulent year
The data that mortgage lending institutions reported for 2008 under the Home Mortgage Disclosure Act of 1975 (HMDA) reflect the ongoing difficulties in the housing and mortgage markets. This article presents a number of key findings from a review of the 2008 HMDA data. In particular, it documents a reduction in lending activity that was experienced by all groups of borrowers, highlights the Federal Housing Administration's greatly expanded role in the mortgage market, and examines how atypical changes in the interest rate environment affected the incidence of reported higher-priced lending in 2008 relative to earlier years.
AUTHORS: Canner, Glenn B.; Avery, Robert B.; Brevoort, Kenneth P.; Bhutta, Neil; Gibbs, Christa N.