Another hidden cost of incentives: the detrimental effect on norm enforcement
Monetary incentives are often considered as a way to foster contributions to public goods in society and firms. This paper investigates experimentally the effect of monetary incentives in the presence of a norm enforcement mechanism. Norm enforcement through peer punishment has been shown to be effective in raising contributions by itself. We test whether and how monetary incentives interact with punishment and how this in turn affects contributions. Our main findings are that free riders are punished less harshly in the treatment with incentives, and as a consequence, average contributions ...
Understanding mortgage spreads
Most mortgages in the U.S. are securitized in agency mortgage-backed securities (MBS). Yield spreads on these securities are thus a key determinant of homeowners? funding costs. We study variation in MBS spreads over time and across securities, and document a cross-sectional smile pattern in MBS spreads with respect to the securities? coupon rates. We propose non-interest-rate prepayment risk as a candidate driver of MBS spread variation and present a new pricing model that uses ?stripped? MBS prices to identify the contribution of this prepayment risk to the spread. The pricing model finds ...
The role of technology in mortgage lending
Technology-based (?FinTech?) lenders increased their market share of U.S. mortgage lending from 2 percent to 8 percent from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20 percent faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby ...
Tracking and stress-testing U.S. household leverage
Borrowers? housing equity is an important component of their wealth and a critical determinant of their vulnerability to shocks. In this paper, we create a unique data set that enables us to provide a comprehensive look at the ratio of housing debt to housing values?what we refer to as household leverage?at the micro level. An advantage of our data is that we are able to study the evolution of household leverage over time and locations in the United States. We find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, and rose very quickly ...
Has MBS Market Liquidity Deteriorated?
Mortgage-backed securities guaranteed by the government-backed entities Fannie Mae, Freddie Mac, and Ginnie Mae, or so-called ?agency MBS,? are the primary funding source for U.S. residential housing. A significant deterioration in the liquidity of the MBS market could lead investors to demand a premium for transacting in this important market, ultimately raising borrowing costs for U.S. homeowners. This post looks for evidence of changes in agency MBS market liquidity, complementing similar posts studying liquidity in U.S. Treasury and corporate bond markets.
What Happens When Regulatory Capital Is Marked to Market?
Minimum equity capital requirements are a key part of bank regulation. But there is little agreement about the right way to measure regulatory capital. One of the key debates is the extent to which capital ratios should be based on current market values rather than historical ?accrual? values of assets and liabilities. In a new research paper, we investigate the effects of a recent regulatory change that ties regulatory capital directly to the market value of the securities portfolio for some banks.
Regional heterogeneity and the refinancing channel of monetary policy
We argue that the time-varying regional distribution of housing equity influences the aggregate consequences of monetary policy through its effects on mortgage refinancing. Using detailed loan-level data, we show that regional differences in housing equity affect refinancing and spending responses to interest rate cuts but that these effects vary over time with changes in the regional distribution of house price growth. We then build a heterogeneous household model of refinancing with both mortgage borrowers and lenders and use it to explore the aggregate implications for monetary policy ...
Payment size, negative equity, and mortgage default
Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced substantial rate reductions over the past years and are largely immune to these selection concerns. We find that payment size has an economically large effect on repayment behavior; for instance, cutting the required payment in half reduces the delinquency hazard by about 55 percent. Importantly, the link between ...
The Evolution of Home Equity Ownership
In yesterday’s post, we discussed the extreme swings that household leverage has taken since 2005, using combined loan-to-value (CLTV) ratios for housing as our metric. We also explored the risks that current household leverage presents in the event of a significant downturn in prices. Today we reverse the perspective, and consider housing equity—the value of housing net of all debt for which it serves as collateral. For the majority of households, housing equity is the principal form of wealth, other than human capital, and it thus represents an important form of potential collateral for ...
How do mortgage refinances affect debt, default, and spending? Evidence from HARP
We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing a mortgage on borrower balance sheet outcomes. We find that on average, refinancing into a lower-rate mortgage reduced borrowers' default rates on mortgages and nonmortgage debts by about 40 percent and 25 percent, respectively. Refinancing also caused borrowers to expand their use of debt instruments, such as auto loans, home equity lines of credit (HELOCs), and other consumer debts that are proxies for spending. All told, refinancing led to a net increase in debt equal to ...