Credit-constrained Households Research Articles

Judged by Their Deeds: Outcomes for Properties Acquired by Contract Sellers Following the Foreclosure Crisis in Detroit

Prior research has documented the reemergence of predatory land contracts in majority-Black neighborhoods in the wake of the foreclosure crisis. Though land contracts facilitate property transfers involving lower-value properties and credit-constrained households, they are less regulated and often include risky terms. This paper investigates outcomes associated with properties sold using land contracts signed between 2008 and 2015 in Detroit, leveraging real estate transaction, tax foreclosure, and eviction and land contract forfeiture records. We also assess outcomes for the broader portfolio of properties purchased by large contract sellers. We find that sales by large contract sellers are generally associated with higher odds of near-term failure. We also find that investors using contract sales withheld property taxes on much of their inventory, consistent with a short-term triage-based business strategy. Conversely, the single large non-profit contract seller in our study had a far higher rate of success compared to all other contract sales. These results provide evidence of negative outcomes for sales initiated by problematic entities and supports arguments for stronger regulation of land contracts and upstream interventions to prevent predatory investors from acquiring discounted homes from public and institutional sources.

Is religion an inferior good? Evidence from fluctuations in housing wealth

An increase in local house prices in the US is associated with a decrease in the time homeowners spend on religious activities compared to renters. Notably, this effect is not observed in volunteering and civic activities. The decline in religious activities is more pronounced for credit-constrained households. The main result is attributed to a wealth effect, whereby activities that have an inferior-good component decline with housing wealth, and to a substitution effect whereby the attractiveness of activities linked to the residential asset increases during housing booms.

Food Consumption–Production Adjustments to Economic Crises under Credit Constraints in Nigeria

Poverty and food security risks are increasing in resource-reliant African countries such as Nigeria. Resultantly, policymakers have attempted to use agricultural policy reforms to boost productivity and increase income. However, macroeconomic instabilities complicate agricultural transformation. Consequently, farm households try to diversify food production to mitigate shock-induced nutrition losses. However, credit constraints disrupt the planting of different crops required for adequate diets. This study investigates food security performance during Nigeria’s Agricultural Transformation Agenda. It examines whether credit-constrained households adjust food consumption and production differently from credit-unconstrained families. The aim is to uncover the nutritional implications of the adjustments and evaluate the changes such a linkage has undergone during the commercialization initiative. While credit-unconstrained households diversified food production to mitigate food security risks, credit-constrained households were unable to do so. A policy that improves credit access for farm-input purchases appeared to increase food security. However, macroeconomic shocks disrupt the smooth implementation of the policy. Resultantly, policy decisions on the designation of a financial-support scheme that approves credit to households for operating off-farm enterprises must be considered. The business profits could complement farm income to improve family nutrition. Part of the profits could again be plowed back into farm-input needs to enhance agricultural commercialization.

The Saving Behavior of Heterogeneous Households and Credit Constraints: A Decomposition

This paper sheds light on how saving decisions respond to credit constraints. In this paper, we examine the role credit constraints play in the savings decisions of households by focusing on a well-defined set of reasons for their savings. To do so, we classify the saving motives as precautionary saving, saving to finance investments, and saving for retirement. We find that credit-constrained households are less likely to save for retirement and liquidity, while they are more likely to save for investment purposes. Constrained Black households are more likely to save for in- vestment purposes. Discouraged households are more likely to save for investment and less likely to save for retirement purposes. When households are credit-constrained, they use their savings to smooth their consumption rather than to accumulate wealth over time.

An investigation of the impacts of asset ratio policy on the banking system during the Covid-19 crisis in Turkey

PurposeThis paper provides a quantitative assessment of the “asset ratio” rule defined in Turkey as part of measures taken to stimulate the economy amid the Covid-19 pandemic. The main objective of the new rule was to boost credit growth in the economy and provide lending for credit-constrained households and firms that are in need. A secondary aim was to shift the denomination structure of the deposits toward domestic currency. Hence, the paper focus particularly on how the policy affected the growth rate of loans and the share of domestic deposits relative to foreign ones among the commercial banks. The policy was also heavily criticized due to the possibility that it will subjugate the banking system to excessive risk. The paper explore this possible impact by measuring how much the policy affected the default risk allowances in the banking system.Design/methodology/approachThe new policy required banks with deposits above a threshold level, i.e. large banks, to maintain a certain asset ratio. Banks with deposits below the threshold, i.e. small banks, were held exempt from it. The paper implement a difference-in difference methodology to assess the quantitative impacts of the asset ratio policy by taking large banks as the treatment group, and small banks as the control group.FindingsDifference-in-difference estimation results suggest that the asset ratio policy resulted in a 9.6% rise in loans and an 8.4% rise in government securities. Deposits also increased, with no significant change in their composition. The policy initially generated a 7% increase in the credit risk allowances of banks in the treatment group, which vanished in the following periods. Based on all these, the paper argue that the policy was successful in providing liquidity to the economy without jeopardizing the financial stability.Research limitations/implicationsThe findings of this study show that asset ratio policy is effective in increasing credit growth in countries with limited policy space such as Turkey. While saying this, the importance of the robust and prudent structure of the banking system in the economy should be underlined. Otherwise, the policy may have an unintended consequence of raising systemic risk. The policy suggestions also apply to advanced countries where the monetary policy has reached a natural limit due to the zero lower bound (ZLB). The ZLB problem encouraged these countries to use quantitative easing schemes in the aftermath of the Covid-19 crisis, just like the global financial crisis. However, it may take a long time to undo the effects of this policy on the balance sheets of central banks. In such cases, asset ratio policy can also be considered as an alternative tool for advanced economies notwithstanding the fact that the banking system should be prudent, well-capitalized and the country should have enough fiscal space. The main objective of the asset ratio policy was to help SMEs that were in urgent need of liquidity at the beginning of the crisis. The bank balance sheet data used in this paper does not contain information about the borrowers of the loans extended during the implementation of the policy. Analysis of this dimension using matched bank-firm level data will better demonstrate the success of the policy in achieving this goal. The paper address this as the main limitation of the paper and leave that analysis for future research.Originality/valueThis paper provides an important contribution to the literature by assessing a new unique policy whose objective is to stimulate loans and mitigate the impact of the Covid-19 crisis on the economy. The policy in question is predicted to have effects on the asset and liability structure and risk exposure of the banking system in Turkey. The quantitative analysis in this study estimates these impacts and discusses the effectiveness of the new policy in providing a relief for firms and households in need. Whether or not the policy caused a disruption in the sound structure of the banking system in Turkey is another question addressed in the paper.

The Sensitivity of Housing Demand to Financing Conditions: Evidence from a Survey

Measuring the sensitivity of housing demand to mortgage rates and available leverage is challenging because there is generally no exogenous variation in these variables. This paper circumvents this issue by designing a strategic survey in which respondents report their willingness to pay (WTP) for a home under different financing scenarios. Relaxation of down payment constraints or an exogenous increase in nonhousing wealth has large effects on WTP, especially for poorer and more credit-constrained households. However, changing the mortgage rate has only moderate effects on WTP. These findings have implications for theoretical models of house price determination and for policy. (JEL G21, G51, R21, R38)

Credit Demand in a Crisis

Negative shocks to housing, most households’ largest consumption good, are expected to create strong credit demand to smooth these shocks over time. We estimate and trace a credit demand curve for households who recently experienced a negative shock to their housing stock. We use administrative data on over one million applications to a federal loan program for households impacted by natural disasters. Our identification strategy exploits 24 quasi-experiments, leveraging exogenous, time-based variation in the program's offered interest rate to estimate extensive-margin demand. We find that households are surprisingly price-sensitive, only a third would accept loans offered at the 30-year mortgage rate. We find a large impact of credit quality on demand and evidence of monthly payment targeting. Credit-constrained households exhibit inelastic demand. Many high credit quality applicants are reluctant to borrow, even at very low interest rates where no private alternative exists.

Labor supply of married foreign-born women in credit-constrained households

In credit-constrained households, some family members who would otherwise not work participate in the labor market. This particular supply of labor, however, is expected to decrease when their families overcome credit constraints. To examine this family investment hypothesis, we develop a test which exploits the dynamic features of the labor supply of married foreign-born women in the United States. Empirical findings, based on the matched March Current Population Survey, are consistent with the hypothesis. This paper also finds that previous results which refute the hypothesis are reversed when the sample is confined to women working in low-skill jobs.

Inflation of home appraisal values and the access to mortgage loans of credit constrained borrowers

Upwards biased appraised home values allow the drawing of larger mortgages, which can be used to give financially constrained households access to mortgage credit. In this paper, I analyze this phenomenon for the first time outside of the US. I use a unique Spanish dataset of matched mortgage–dwelling–borrower characteristics covering the period 2004–2010. The data allow me to construct a measure of home appraisal bias. The results indicate that appraised home values were inflated on average by around 30% with respect to the contract purchase prices. I also observe that credit-constrained households were more likely to be involved in mortgages with inflated house values and that upwards bias in appraisals was more likely to occur in mortgage markets in which there was a higher degree of competition among lenders. This situation led lenders to lower credit standards dramatically.

Diversification of Human Capital Investments in Rural Ethiopia

We investigate household-level diversification of human capital investments in a rural developing country setting. Returns to schooling and to the alternative, which includes acquisition of traditional agrarian knowledge, are uncertain. The theoretical model combines a portfolio-choice model with a human capital investment model. Diversification implies a negative relationship between education of the younger and the older sibling. Diversification is more important in more risk-averse households, and we use the interaction between sibling dependency in education and risk preferences to empirically test for diversification. Moreover, diversification is less important in credit-constrained households. The empirical analysis employs data on school entry of boys and girls in the rural Amhara region of Ethiopia. The results suggest diversification across brothers in households that are less credit-constrained.

Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-based Model with Credit Rationing

We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how different inequality shocks affect income dynamics and the effects of different types of fiscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with different types of fiscal policies to counter the effects of inequality-generated recessions, namely deficit-spending direct government consumption and redistributive subsidies financed by different types of taxes. We find that the introduction of subsidies is in general associated with higher fiscal multipliers than cases with direct government expenditure alone, as they appear to be better suited to sustain consumption of lower income households after the shock.

Credit Access and Household Welfare: Evidence from Payday Lending

How does gaining access to expensive credit affect the well-being of credit-constrained households? I use plausibly exogenous zip code level variation in the temporal accessibility of payday loans to examine the causal effects of access to payday loans on household well-being. Using suicide risks as a long-term measure for household distress, I find detrimental effects from payday loans; that is, there is a sharp increase in attempted suicides after gaining access to payday loans only for people effectively eligible for payday loans. The increased suicide risks appear to be related to mental health deterioration from financial distress.

Inequality, Redistributive Policies and Multiplier Dynamics in an Agent-Based Model with Credit Rationing

We build an agent-based model populated by households with heterogenous and time-varying financial conditions in order to study how different inequality shocks affect income dynamics and the effects of different types of fiscal policy responses. We show that inequality shocks generate persistent falls in aggregate income by increasing the fraction of credit-constrained households and by lowering aggregate consumption. Furthermore, we experiment with different types of fiscal policies to counter the effects of inequality-generated recessions, namely deficit-spending direct government consumption and redistributive subsidies financed by different types of taxes. We find that subsidies are in general associated with higher fiscal multipliers than direct government expenditure, as they appear to be better suited to sustain consumption of lower income households after the shock. In addition, we show that the effectiveness of redistributive subsidies increases if they are financed by taxing financial incomes or savings.

Credit constraints and their impact on farm household welfare

Purpose – The purpose of this paper is to identify factors affecting formal credit constraint status of rural farm households in Vietnam’s North Central Coast (NCC) region. Design/methodology/approach – Using the direct elicitation method (DEM), the authors consider both internal and external credit rationing. Findings – Empirical evidences confirm the importance of household head’s age, gender and education to household’s likelihood of being credit constrained. In addition, households who have advantages in farm land size, labour resources and non-farm income are less likely to be credit constrained. Poor households are observed to remain restricted by formal credit institutions. Results from the endogenous switching regression model suggest that credit constraints negatively impact household’s consumption per capita and informal credit can act as a substitute to mitigate the negative influence of formal credit constraints. Research limitations/implications – One limitation arises from the usage of the DEM to identify credit constrained households. The method cannot detect effective and ineffective constraints. Another limitation is the inability of cross-section data to capture long-term impacts of credit constraints on household welfare. Finally, causes of credit constraints from the lender’s view cannot be observed. Practical implications – The results suggest that it is necessary to enhance the credit allocation regime to reduce the transaction cost and provide target households with sufficient credit. It should be emphasized that high transaction cost and the mismatch between credit demand and supply stemming from information asymmetry. The government can help formal financial institutions to reduce information cost by encouraging the active role of social organizations such as Women Unions, Youth Unions and Veteran Unions in bridging rural farm households with formal lenders. Originality/value – There are limited studies focusing on determinants of credit constraints and their impacts on rural farm households. To the best of the knowledge, there is no study evaluating the impact of credit constraints on rural farm household welfare particularly in Vietnam. In addition, the studies related to credit constraints only considered full quantity rationing (households applied for the loan but were rejected), omitting the case of partly quantity rationing (loan obtained by the borrowers is less than their demand) and self-rationing.

Monetary Policy When Households Have Debt: New Evidence on the Transmission Mechanism

In response to an interest rate change, mortgagors in the United Kingdom and United States adjust their spending significantly (especially on durable goods) but outright home-owners do not. While the dollar change in mortgage payments is nearly three times larger in the United Kingdom than in the United States, these magnitudes are much smaller than the overall change in expenditure. In contrast, the income change is sizable and similar across both household groups and countries. Consistent with the predictions of a simple heterogeneous agents model with credit-constrained households and multi-period fixed-rate debt contracts, our evidence suggests that the general equilibrium effect of monetary policy on income is quantitatively more important than the direct effect on cash flows.

Fiscal stimulus and distortionary taxation

We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark medium-scale New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.53 and modestly negative long-run multipliers around −0.36. We compare and relate recent literature multiplier calculations to ours. We explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and credit-constrained households.

Household Borrowing During a Creditless Recovery

We investigate the factors behind the borrowing of households during a creditless recovery. We use data from a typical creditless recovery case—Estonia during the aftermath of the global financial crisis. Cross-sectional data on households’ assets, liabilities, income, expectations, and intention to use credit in 2001–10 and 2012 are employed. The results indicate that two-thirds of the sluggish recovery in credit demand can be explained by changes in household endowments such as income reduction and lower income expectations, while one-third remains unexplained and is ascribed to changes in behavioral relations. It is noted that the share of credit-constrained households was very high during the creditless recovery period.

The Schubert Effect: When Flourishing Businesses Crowd Out Human Capital

We show that in family or household firms, credit constraints can make business investment a direct competitor to educational investment. We test this theory on data collected in Cameroon. Households that are not restricted by credit constraints invest more in education when demand for the product they produce and sell increases. However, credit-constrained households react in the opposite way: when demand increases, they invest less in education, as predicted by our theory. We obtain these results controlling for endogeneity of family size, of demand conditions, and credit constraints.

Mortgage Rates, Household Balance Sheets, and the Real Economy

This paper investigates the impact of lower mortgage rates on household balance sheets and other economic outcomes during the housing crisis. We use proprietary loan-level panel data matched to consumer credit records using borrowers' Social Security numbers, which allows for accurate measurement of the effects. Our main focus is on borrowers with agency loans, which constitute the vast majority of U.S. mortgage borrowers. Relying on variation in the timing of resets of adjustable rate mortgages, we find that a sizable decline in mortgage payments ($150 per month on average) induces a significant drop in mortgage defaults, an increase in new financing of durable consumption (auto purchases) of more than 10% in relative terms, and an overall improvement in household credit standing. New financing of durable consumption by borrowers with lower housing wealth responds more to mortgage payment reduction relative to wealthier households. Credit-constrained households initially use more than 70% of the extra liquidity generated by mortgage rate reductions to repay credit card debt-- a deleveraging response that can significantly restrict the ability of monetary policy to stimulate these households' consumption. These findings also qualitatively hold in a sample of less-prevalent borrowers with private non-agency loans. We then use regional variation in mortgage contract types to explore the impact of lower mortgage rates on broader economic outcomes. Regions more exposed to mortgage rate declines saw a relatively faster recovery in house prices, increased durable (auto) consumption, and increased employment growth, with responses concentrated in the non-tradable sector. Our findings have implications for the pass-through of monetary policy to the real economy through mortgage contracts and household balance sheets.

International capital flows and the boom-bust cycle in Spain

We study the joint dynamics of foreign capital flows and real activity during the recent boom-bust cycle of the Spanish economy, using a three-country New Keynesian model with credit-constrained households and firms, a construction sector and a government. We estimate the model using 1995Q1-2013Q2 data for Spain, the rest of the Euro Area (REA) and the rest of the world. We show that falling risk premia on Spanish housing and non-residential capital, a loosening of collateral constraints for Spanish households and firms, as well as a fall in the interest rate spread between Spain and the REA fuelled the Spanish output boom and the persistent rise in foreign capital flows to Spain, before the global financial crisis. During and after the global financial crisis, falling house prices, and a tightening of collateral constraints for Spanish borrowers contributed to a sharp reduction in capital inflows, and to the persistent slump in Spanish real activity. The credit crunch was especially pronounced for Spanish households; firm credit constraints tightened later and more gradually, and contributed much less to the slump.