Mortgage Debt Research Articles

The Impact of Federal Housing Policy on Housing Demand and Homeownership: Evidence from a Quasi-Experiment

Federal housing policy promotes homeownership by subsidizing mortgage debt for many households with few assets and low credit scores. In this paper, we exploit the Federal Housing Administration’s (FHA’s) surprise 50 basis point cut to its annual mortgage insurance premium in January 2015 to study the impact of federal housing policy and interest rates on housing demand for a population of households likely to be influenced by changes to policy. The premium cut, which reduced monthly payments the same amount as a three-quarter percentage point drop in the mortgage rate, increased the purchasing power of the typical FHA borrower by 6 percent. Our analysis suggests FHA borrowers increased the value of the housing they purchased by 2.5 percentage points relative to a control group of borrowers in areas with minimal FHA presence. The rise in spending reflected an increase in constant-quality home prices, with no significant change in the quality of housing purchased by FHA buyers. We also estimate that the premium cut induced approximately 17,000 households to become first-time homebuyers in the initial year after the cut, an increase that fell far short of the FHA’s projection. Because the rise in constant-quality house prices affected both FHA and other buyers in areas with substantial FHA lending, non-FHA first-time buyers as a group incurred a cost of $180,000 for each of the 17,000 new first-time FHA buyers.

Mortgage Modifications after the Great Recession: New Evidence and Implications for Policy

In the aftermath of the Great Recession, various mortgage modification programs were introduced to help homeowners struggling to make their monthly mortgage payments remain in their homes. We use mortgage data at the individual borrower level, joined to credit card spending and deposit account data, to investigate the relative importance of changes in monthly mortgage payments and long-term mortgage debt on default and consumption. We first quantify the variation in payment reduction offered by these modification programs and then use the variation in payment and principal reduction experienced by program recipients to estimate the impact of payment and principal reduction on default and consumption. First, we find that payment reduction for borrowers with similar payment burdens varied by two to three times across different modification programs. Borrowers with a high mortgage payment to- income (PTI) ratio received more than twice the payment reduction from HAMP compared to the GSE program. Borrowers with a low mortgage PTI ratio received three times the payment reduction from the GSE program compared to HAMP. Second, a 10 percent mortgage payment reduction reduced default rates by 22 percent. Third, for borrowers who remained underwater, mortgage principal reduction had no effect on default. This suggests that “strategic default” was not the primary driver of default decisions for these underwater borrowers. Fourth, for borrowers who remained underwater, mortgage principal reduction had no effect on consumption. Finally, default was correlated with income loss, regardless of debt-to-income ratio or home equity. Mortgage default closely followed a substantial drop in income. This pattern held regardless of pre-modification mortgage PTI or loan-to-value ratio, suggesting that it was an income shock rather than a high payment burden or negative home equity that triggered default. These findings suggest that mortgage modification programs that are designed to target substantial payment reduction will be most effective at reducing mortgage default rates. Modification programs designed to reach affordability targets based on debt-to-income measures without regard to payment reduction or target a specific LTV ratio while leaving borrowers underwater may be less effective at reducing defaults. Furthermore, policies that help borrowers establish and maintain a suitable cash buffer that can be used to offset an income shock could be an effective tool to prevent mortgage default. Both high and low mortgage PTI borrowers experienced a similar income drop just prior to default, suggesting that even among those borrowers with “unaffordable” mortgages, it was a drop in income rather than a high level of payment burden that triggered default.

Immigration, race, mortgage lending, and the geography of debt in Canada’s global cities

While scholars typically analyze debt relations as social relations, often at the national or global level with respect to international flows of global capital and interest payments, there has been less attention on how international mobility and immigration are constitutive of geographies of debt. An urbanized nation with a reputation for welcoming high levels of immigration, as well as for escaping the worst of the global financial crisis with no banking crisis, Canada has also received international attention for high housing prices and high levels of household debt, particularly in its global cities. What has not yet received sufficient attention are the potential effects of federal government policies and programs in encouraging new immigrants to take out disproportionately large mortgages to access owner-occupied housing, nor the implications of such programs and migrant flows for understanding geographies of debt. Justified by proponents of asset-based welfare, homeownership is purported to be crucial for immigrant integration and economic mobility, and yet, literature linking the socio-spatial dynamics of immigrant debt to asset-based welfare policies and the creation of citizen subjectivities remains scarce. This paper investigates questions related to these issues in Canada's three global cities, Toronto, Montreal and Vancouver, using data aggregated at the neighbourhood scale. The results point to an interaction effect between federal policies encouraging homeownership, metropolitan housing costs, and neighbourhood immigrant debt levels. Not only do immigrants bear significantly higher debt burdens than do native-born Canadians, but many neighbourhoods with a high concentration of immigrants, particularly in the metropolitan areas with the tightest housing markets, have significantly higher levels of mortgage debt than other neighbourhoods. Such geographies of debt, we suggest, have implications not only for intra-urban spatial distributions of debt and wealth, but also for understanding how the spatiality of debt interacts with federal policies and national financial vulnerabilities and resiliences, pointing to the importance of immigration flows and policies in helping produce and maintain financial flows and financial power.

Varieties of indebtedness: Financialization and mortgage market institutions in Europe

During the global housing boom that preceded the 2007–9 financial crisis, household debt increased substantially in many European countries, posing a challenge for literature on financialization and the institutional heterogeneity of mortgage markets. This paper examines recent institutional shifts in European mortgage markets and specifies three analytically distinct models of debt accumulation: inclusion, extension and intensity. While existing research has emphasized inclusion (access to homeownership), we show that financial intensification is an important determinant of cross-national variation in debt. We assess the variation in financial intensity in six European countries (France, Germany, Italy, the Netherlands, Portugal and Spain) using household-level survey data. Our results show that inclusion and expansion explain only part of the cross-national variation in mortgage debt to income ratios. Furthermore, household financial behavior is consistent with the financial intensity model, and variation in the degree of financial intensification explains a substantial portion of the cross-national difference in debt levels.

Household financialization – sense and scale of this phenomenon on the example of poland

Abstract The subject of the study is the phenomenon of household financialization. In the first part of the article a sense of this situation and its influence on the different functioning areas of the households (income, expenses, financial decisions) is described. What is more, the positive and negative effects of this process for the households’ financial stability were defined. The next part of the article contains an analysis of the households financialization processes in Poland in the years 2005-2015. On the side of household savings, the analysis included the level and the structure of financial assets. The second area of evaluation of the household financialization processes was bank debt analysis, including mortgage debt. In the elaboration comparative analysis was used, which means that Polish household structure of financial assets and the level of debt were compared to the European Union countries.

A QUEST FOR UNFETTERED CREDIT: HOW MONETARY POLICY DRIVES CREDIT RISK TRANSFER OF STRUCTURED FINANCE PRODUCTS

This study examines the effects of monetary policy contractions on bank loans to households and firms and instruments in three different credit risk transfer (CRT) capital markets over two separate time periods (1995–2006 and 2007–2015). The findings show that in both periods, banks decrease business lending but increase lending to consumers through a combination of mortgage, auto, credit card, and student loans from more liquidity produced by consumer‐related CRT activity. Additional results reveal relative CRT movements toward securitized mortgages from bank mortgage debt over both periods and toward securitized and insured business loans from bank business debt in the latter period, which suggest vulnerabilities among interconnected credit markets. (JEL E44, E51, G21, G23)

Monetary Policy in Times of Debt

We model an economy with long-term mortgages and show that some characteristics of mortgage contracts – such as the type of interest rate (adjustable versus fixed) and the loan-to-value ratio – matter for the transmission of monetary policy impulses, both conventional and unconventional. A conventional monetary policy shock has a stronger impact on output and inflation with adjustable-rate mortgages, also reflecting the higher sensitivity of installments to changes in the short-term rate. When households borrow at a fixed rate, unconventional monetary policy can stimulate the economy mainly through a redistribution of income from savers to borrowers, who have a higher marginal propensity to consume. The impact of monetary policy – both conventional and unconventional – is stronger when the level of households' mortgage debt is high relative to housing wealth.

What Shapes Consumer Choice and Financial Products? A Review

Central to the field of consumer finance is that consumers make financial decisions that do not always coincide with the financial decisions ideally depicted in optimal economic models. In this review, we discuss developments in the field of household finance, focusing on how consumers make suboptimal financial decisions across different types of settings and factors that affect their decisions. Rather than conducting a comprehensive survey, we focus specifically on consumer choice in the context of research on credit card borrowing, housing and mortgage debts, investment and savings decisions, and spending and consumption. We also discuss financial product design and marketing, as well as the regulatory landscape of lenders of consumer financial products. We present five future research directions and considerations for researchers and policymakers.

Mortgage debt and entrepreneurship

We study the link between mortgage debt and entrepreneurship using a model of occupational choice and housing tenure in a setting where loans are recourse—like in the UK and several US states. Our model shows that as long as the mortgage interest rate exceeds the risk-free rate: (i) mortgage debt diminishes the likelihood of entrepreneurship by amplifying risk aversion; and (ii) the negative relation between mortgage debt and entrepreneurship increases with income volatility. Our model also shows that the link between housing equity and entrepreneurship is ambiguously signed because of competing portfolio and wealth effects. We use the British Household Panel Survey to test and confirm the model predictions, and deal with unobservable heterogeneity employing three research designs—individual fixed effects, housing-spell fixed effects, and instrumental variables. A one standard deviation increase in leverage reduces the probability of entrepreneurship by 10–20 percent.

Superannuation and Bankruptcy: Is there a Mid-Life Crisis Looming?

Research suggests that Australian bankrupts are increasingly older, have professional backgrounds and generally enjoy higher levels of income than has previously been the case. Significantly, available data also indicates that the numbers of persons entering into bankruptcy hold greater levels of real property, and associated mortgage debt, than in previous decades. Given these trends, the importance of protecting superannuation funds becomes paramount to a bankrupt. However, this paper argues that there is a need to balance the protected asset status of superannuation funds with other objectives, such as achieving a fair distribution of the bankrupt’s assets among creditors. This paper examines the extent to which this balance is achieved, particularly in the context of self-managed superannuation funds.

Mortgaging Europe's Periphery

This paper is concerned with the development of housing finance in peripheral European states. Interestingly, the biggest mortgage and housing booms and busts prior to the Global Financial Crisis (GFC) have occurred in these countries, rather than in the core. This is surprising, given the comparatively low level of mortgage debt and the unsophisticated financial sectors in the periphery. The mortgage and housing booms and busts have also made these countries highly vulnerable to the fallout from the GFC, and have often been associated with severe banking and even sovereign debt crises. The paper asks why peripheral countries have been particularly vulnerable to housing and mortgage booms and busts; how these have shaped their exposure to the GFC, and how the GFC has affected peripheral housing finance. Building on literature on housing financialization and varieties of residential capitalism, the paper traces trajectories of housing-induced financialization before and after the GFC in four European peripheral countries: Hungary, Latvia, Ireland and Iceland. The paper argues that their differences notwithstanding, Europe’s East and peripheral Northwest have been characterized by high homeownership rates and unsophisticated mortgage markets. The evolving EU framework for free movement of capital and provision of financial services as well as the availability of ample and cheap credit has induced a trajectory of financialization, which has taken two major but not mutually exclusive forms: domestic financial institutions’ reliance on funding from wholesale markets, and direct penetration of foreign financial institutions. These two forms of financialization attest to a core-periphery relationship in the recent episode of housing financialization, whose hierarchical character played out in the crisis. Peripheral European countries experienced sudden stops and reversals of capital flows, which badly affected their banking systems. Unable to solve the looming banking crises on their own, they had to turn to creditors to gain access to much needed capital inflows. Different combinations of international conditionality, domestic policy responses and the original level of mortgage debt result in different trajectories in housing finance after the crisis.

Sunk-Cost Fallacy and Seller Behavior in the Housing Market

We use a unique feature of California's property tax system to empirically identify the effect of selling homeowners' past property tax payments on their choice of listing price. Although past property taxes are sunk costs, we find that they have a significant positive effect on the sellers' choice of listing price, which is inconsistent with rational models of decision making. This effect is stronger when sellers expect to sell at a loss relative to their purchase price, for high-valued properties, and in zip codes with lower housing transaction volumes. Interestingly, the sunk-cost effect is also stronger for sellers with higher mortgage debt, especially when they expect to incur a loss on the sale. Overall, our results suggest that the sunk-cost fallacy affects seller behavior in the housing market.

How Do Firms Finance Nonprimary Market Investments? Evidence from REITs

AbstractThis study explores the impact of investment characteristics, mainly investment location relative to the firm's primary market, on financing choices by real estate investment trusts (REITs). Using a large sample of commercial property acquisitions, we show that REITs are 4–8% less likely to use secured (mortgage) debt when acquiring properties in their primary markets than elsewhere. The documented evidence supports a demand‐side story for the relation between investment characteristics and financing. Moreover, the evidence is consistent with the hypothesis that REITs avoid mortgage financing in their primary markets to preserve operational flexibility in those markets.

How Do Firms Finance Non-Core Investments? Evidence from REITs

Using a large sample of commercial property acquisitions by real estate investment trusts (REITs), we show that property investment characteristics affect financing. Specifically, REITs are 4-8% less likely to use secured (mortgage) debt when investing in core market properties. The evidence points to a demand-side explanation for the relation between investment characteristics (core vs. non-core) and project financing. Moreover, our analysis provides support for the hypothesis that firms avoid mortgage financing in core markets to preserve operational flexibility in these markets.

Debt, death, and divorce: aging into foreclosure in the U.S. Deep South

ABSTRACTOlder homeowners have faced financial pressures since the Great Recession of 2007–2011, including from mortgages that are carried into retirement. In order to chart the postrecession impact of housing loss among older homeowners at a granular level, I used municipal and archival sources to analyze 484 households involving 784 foreclosees in a racially defined county of the U.S. Deep South. Three major and related findings emerged from this exploratory study. First, 65% of foreclosees had acquired second mortgages on their homes prior to the recession; an even higher percentage (77%) had incurred court judgments for auto loans, credit card debt, taxes, and medical expenses prior to foreclosure. Second, African-Americans experienced foreclosure at a significantly higher rate than Whites, especially among older women who were sole owners. Finally, 68% of foreclosees had either died or divorced within 5 years of foreclosure; these events represented financial stressors in older age, or mortgage debts for survivors and their families. The financial vulnerability of older foreclosees who carry mortgages into retirement has important implications for housing stability across the United States, particularly in communities of color and poor regions where housing loss is linked to age-income inequalities.

Poverty in Europe: Sociodemographics, Portfolios, and Consumption of Wealth‐Poor Households

In this article, I describe the portfolio structure of poor households within the euro area (EA) using microdata from the Household Finance and Consumption Survey (HFCS), the Luxembourg Wealth Study (LWS), and the Luxembourg Income Study (LIS). My approach differs from existing ones in that I analyze the (net) wealth‐poor instead of the income‐poor households. I am able to identify households in the bottom net wealth decile and study their portfolio structure. From a methodological point of view, my study shows that a poverty indicator based on households’ net wealth needs to be designed and interpreted with great care. Given that wealth accumulates over time and (high‐ income) households can borrow against their future income stream, it is not clear whether low net wealth holdings are really indicative of being poor, for example, in the sense of material deprivation or consumption opportunities. As consumption can be financed from wealth and income, an indicator combining wealth and income may be a solution. I find significant heterogeneity in the portfolios of households in the bottom net wealth decile across countries. The characteristics of the group of households with low wealth are different across countries as well. Real assets are held by fewer less wealthy households than financial assets, and almost all wealth‐poor households own deposits and sight accounts, but only a few have mortgage debt. Wealth‐poor households are, on average, smaller than other households, and their heads are younger. Additionally, less wealthy households are not the unemployed households with low education levels. In some countries, highly educated household heads and full‐time employees belong to the wealth‐poor. The poor households spend, on average, about 20 percent of their gross income on food.

(A Financial Planning Case for a House Poor)

Korean Abstract: 하우스푸어는 주택을 소유함에도 불구하고 가처분소득 가운데 주택관련대출로 인한 원리금 상환에 큰 비용이 들어 가계재정 유지에 어려움을 겪는 가구를 의미한다. 최근 가계부채의 급격한 증가가 주요한 경제문제로 대두되고 있는 것으로 볼 때 하우스푸어 문제가 상당히 심각한 수준일 것으로 추측되고 있다. 본 연구에서는 주택관련대출로 인하여 심각한 고통을 겪고 있는 하우스푸어의 재무설계 사례를 제시한다. 본 사례에서의 고객은 고소득임에도 불구하고 매월 주택관련 대출상환문제와 함께 생활비, 교육비, 양육비 등으로 월 소득이 적자인 상황에서 고통스럽게 생활하고 있었다. 본 재무설계 사례에서는 실행가능한 재무 솔루션을 통해 합의점을 찾고, 지속적인 모니터링을 통해 주택관련 부채에서 해방되어 궁극적으로 하우스푸어를 벗어나게 되는 과정을 제시하고 있다. English Abstract: House poor means households that are struggling to maintain household finances for a large cost of repayment out of disposable income due to the mortgage loan. All things considered, recently the economic problem has come to the fore due to rapid increase in household debt, house poor problem is being speculated to be a fairly serious level. This paper tries to present a financial planning model for a house poor who is suffering from serious pain from mortgage debt. In spite of a high-income bracket, they have lived in short of income due to redemption of the loan, daily living expenses, educational expenses for children and parents support expenses. In this financial planning case, we reach an agreement for a feasible financial solution. This financial planning case shows the importance of continuous monitoring and debt management.

Debt revolts: Ecuadorian foreclosed families at the PAH in Barcelona

Can present day grassroots direct actions be considered revolutionary? In this paper, I argue that seemingly “reformist” demands can be considered revolutionary in today’s neoliberal capitalism. At the turn of the twenty-first century, working class Ecuadorian migrants in Barcelona were trying to join the global middle classes via subprime mortgage loans and despite their precarious jobs. Following the collapse of Spain’s housing bubble, unemployed, defaulting on their mortgages, and risking home eviction, they turned to housing activism. They joined the Platform for People Affected by Mortgages (PAH) and became daily protestors for the right to housing and against indebtedness. Looking at PAH approaches that encouraged debt default among low-income families, strategies to reconvert repossessed homes by rescued banks into social housing units, or the effective occupation of buildings that belonged to these banks by the PAH to house evicted families, I claim that these moments represent revolutionary instances of a broader fight against indebtedness taking place globally which can be considered—as many did at the PAH—a fight against capitalism at large. In this paper I illustrate how people who had seldom participated in social mobilization became part of a small Barcelonan movement for the right to housing that grew exponentially throughout Spain succeeding in canceling thousands of mortgage debts and stopping equally as many evictions. PAH’s spaces of encounter and action made possible a cross-class alliance upheld by weekly assemblies and near daily direct actions against financial institutions and a pro-austerity central government. These moments demonstrate the ability of everyday people to reclaim housing, redefine the narrative of indebtedness, and—in the case of Barcelona—it even made possible taking control of City Hall.

Explaining the Boom-Bust Cycle in the U.S. Housing Market: A Reverse-Engineering Approach

We use a simple quantitative asset pricing model to reverse-engineer the sequences of stochastic shocks to housing demand and lending standards that are needed to exactly replicate the boom-bust patterns in U.S. household real estate value and mortgage debt over the period 1995 to 2012. Conditional on the observed paths for U.S. disposable income growth and the mortgage interest rate, we consider four different specifications of the model that vary according to the way that household expectations are formed (rational versus moving average forecast rules) and the maturity of the mortgage contract (one-period versus long-term). We find that the model with moving average forecast rules and long-term mortgage debt does best in plausibly matching the patterns observed in the data. Counterfactual simulations show that shifting lending standards (as measured by a loan-to-equity limit) were an important driver of the episode while movements in the mortgage interest rate were not. All models deliver rapid consumption growth during the boom, negative consumption growth during the Great Recession, and sluggish consumption growth during the recovery when households are deleveraging.

A Case Note: Potential Tax Strategies for a Debtor Trying to Avoid Bankruptcy

In the State of New Jersey alone, there were 31,534 bankruptcy petitions filed in 2012 calendar year. Similarly, as of September 30, 2013, there were 28,882 bankruptcy petitions filed in the state of New Jersey. A typical debtor who is forced into bankruptcy has substantial credit card debt and one or several mortgage liabilities. Unable to pay on the obligations as they become due, the debtor defaults. Once in default and the liability on the debts are over $14,425, creditors can file an involuntary bankruptcy petition and foreclose on the existing properties. New Jersey remains the state with the second-highest foreclosure rate behind Florida, according to CoreLogic’s monthly National Foreclosure Review. Nationwide, 5.55 percent of homes are late on their mortgage payments. Moreover, if any portion of the mortgage debt is forgiven as part of the foreclosure process, it could trigger tax consequences. This paper examines what choices does a debtor have when faced with multiple delinquencies. © 2017 Wiley Periodicals, Inc.