Collateral Damage: House Prices and Consumption During the Great Recession
Did a decline in house prices cause the Great Recession? And if so, how? Credit constraints may be the key to answering those questions
What have we learned about mortgage default?
By the end of 2009, one out of every 11 mortgages was seriously delinquent or in foreclosure. Economists have devoted considerable energy over the past several years to understanding the underlying causes of this increase in defaults. One goal is to provide a guide to dealing with the existing problems. In addition, a better understanding may help avoid future problems. In ?What Have We Learned About Mortgage Default?? Ronel Elul reviews recent research that has shed light on two areas: the extent to which securitization is responsible for the increase in default rates; and the relative ...
The promise and challenges of bank capital reform
The failure and bailout of some prominent financial institutions amid the crisis of 2007-09, and the effect these events had on the economy as a whole, have led policymakers to rethink how the global financial system is regulated. These changes, commonly known as the Basel III Accords, will require banks to maintain more capital in reserve, hold higher-quality capital, and assign greater risk weights to certain types of assets.
The government-sponsored enterprises: past and future
Fannie Mae and Freddie Mac's role in the housing bubble and financial crisis remains controversial. Did they precipitate or at least worsen the crisis? How do their benefits compare against their losses? Ronel Elul traces their evolution and actions and outlines reform proposals.
Owner occupancy fraud and mortgage performance
We use a matched credit bureau and mortgage data set to identify occupancy fraud in residential mortgage originations, that is, borrowers who misrepresented their occupancy status as owner occupants rather than residential real estate investors. In contrast to previous studies, our data set allows us to show that such fraud was broad based, appearing in the government-sponsored enterprise market and in loans held on bank portfolios as well. Mortgage borrowers who misrepresented their occupancy status performed worse than otherwise similar owner occupants and declared investors, defaulting at ...
Understanding house price index revisions
Residential house price indexes (HPI) are used for a large variety of macroeconomic and microeconomic research and policy purposes, as well as for automated valuation models. As is well known, these indexes are subject to substantial revisions in the months following the initial release, both because transaction data can be slow to come in, and as a consequence of the repeat sales methodology, which interpolates the effect of sales over the entire period since the house last changed hands. We study the properties of the revisions to the CoreLogic House Price Index. This index is used both by ...
Securitization and mortgage default
We find that private-securitized loans perform worse than observably similar, nonsecuritized loans, which provides evidence for adverse selection. The effect of securitization is strongest for prime mortgages, which have not been studied widely in the previous literature and particular prime adjustable-rate mortgages (ARMs): These become delinquent at a 30 percent higher rate when privately securitized. By contrast, our baseline estimates for subprime mortgages show that private-securitized loans default at lower rates. We show, however, that ?early defaulting loans? account for this: those ...
How Big is the Wealth Effect? Decomposing the Response of Consumption to House Prices
We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining ...
Owner-Occupancy Fraud and Mortgage Performance
We use a matched credit bureau and mortgage dataset to identify occupancy fraud in residential mortgage originations, that is, borrowers who misrepresented their occupancy status as owner-occupants rather than residential real estate investors. In contrast to previous studies, our dataset allows us to show that – during the housing bubble – such fraud was broad based, appearing in the government-sponsored enterprise market and in loans held on bank portfolios as well, and increases the effective share of investors by 50 percent. We show that a key benefit of investor fraud was obtaining a ...
Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times
When home prices threaten to decline, lenders bearing more of a community’s mortgage risk have an incentive to combat this decline with new lending that boosts demand. We test whether this incentive drove the government-sponsored enterprises (GSEs) to guarantee riskier mortgages in early 2007, as the chance of substantial declines grew from small to signiﬁcant. To identify the eﬀect we relate new risky lending to regional variation in the GSEs’ exposure and the interaction of this variation with home-price elasticity. We focus on the GSEs’ discretion across potential purchases by ...