Mortgage Debt Research Articles

Interest-only-mortgages and housing market fluctuations in Denmark

Low repayment rates on mortgages have probably contributed to increased macroeconomic imbalances for several countries in recent years. The objective of this paper is to analyze how the introduction of interest-only-mortgages in 2003 affected the Danish housing market. Using quarterly data between 2001 and 2013, we analyze the long- and short-run relationships between mortgage repayments and three dependent variables: real house prices; the number of property sales; and mortgage debts in relation to disposable income. We find that including mortgage repayments in nominal housing payments improves the econometric fit when predicting house prices and mortgages in relation to disposable incomes in both the long run and the short run, but not when modeling sales. Also, the conventional user cost variable either turn out insignificant or with the “wrong” (i.e. positive) sign, while nominal housing payment, including mortgage repayments, are significantly negative. However, some regression results are sensitive to specification and there are some indications of reversed causality issues. We therefore perform complementary event studies. The results of the event studies suggest that real house prices and the mortgage debt ratio increased considerably faster than otherwise expected between the introduction of interest-only-mortgages and the start of the financial crisis in 2007. Results are similar when using the results from our long- and short-run regressions to simulate the effects of introducing interest-only-mortgages. Our most conservative estimates suggest that the introduction of interest-only-mortgages raised real house prices and the mortgage debt ratio by about twenty and ten percent between 2003 and 2013, respectively. Our results raise questions of whether households base their decisions on real or nominal variables, actual costs, or cash flows, and if interest-only-mortgages have promoted housing affordability or have rather contributed to increased house prices and household debts.

Mortgage debt and social externalities

In an attempt to keep up with the social standards defined by their peer group, households can use long-term collateralized lending to finance purchases of goods that signal social value – most notably, real estate. Because in the social status game somebody's advance is always somebody else's regress, this behavior can lead to inefficient allocations, making the economy as a whole more financially vulnerable. In this paper, we show that prudential policy taking the form of collateral constraints can mitigate the negative consequences of social arms races, and potentially improve household welfare. We introduce preferences for social status in a calibrated life cycle framework with heterogeneous agents, and find that positional concerns lead to a higher build-up of debt and a net loss of resources. In equilibrium, the optimal collateral policy results from the trade-off between a usual purely distortionary effect, and the negative social externalities of over-borrowing.

Competition and Appraisal Inflation

In mortgage debt contracts, real property serves as collateral and the terms of mortgage financing are largely conditional on the certification of collateral value by appraisers. However, overstatement of collateral value is common in the appraisal industry, causing troubles in the mortgage market as observed in the recent crisis. In this paper, we examine whether competition in the appraisal industry affects appraisal bias. We model appraiser behavior given a loan officer’s preference for favorable appraisals (i.e. appraisal values at least as high as the transaction prices). As appraisers cater to loan officers to increase their probability of winning future business, our model predicts more inflated appraisals in more competitive markets. We confirm this prediction using a sample of purchase mortgages originated between 2003-2006 by a large subprime mortgage lender. Our results show that a one standard deviation increase in appraiser competition, measured at the MSA/year level, is associated with a 1.6–3.7 percentage point increase in the share of at-price appraisals. Furthermore, the effect is stronger in areas experiencing high house price growth.

Heterogeneous Spillovers of Housing Credit Policy

We study the spillovers from government intervention in the mortgage market on households’ consumption using the household survey data from the US. After an expansionary mortgage market operation, the increase in consumption of homeowners with mortgage debt is large and significant, while the consumption response of homeowners without the mortgage debt is small and insignificant. Non-homeowners also increase their consumption but less than mortgagors. We also find that expansionary policy significantly increases the consumption inequality of mortgagors. We explain these facts through the lens of a lifecycle model with incomplete markets and endogenous housing choice. Reduction in credit rates creates extra wealth for the mortgagors while a reduction in interest rates shifts this wealth towards consumption. An increase in wealth is bigger for those with a larger mortgage- this exacerbates consumption inequality.

Mortgage Foreclosures and Older Americans: A Decade after the Great Recession

Economic conditions have improved since the U.S. mortgage market crisis, and home prices have recovered in many areas. Yet many more older families have taken on greater mortgage debt than in the past, and they are increasingly carrying mortgage loans into retirement. Foreclosure rates for all loans have decreased to pre-recession levels for borrowers under age 50, while for borrowers age 50+, foreclosure rates in 2017 were higher than in 2007. This means that many older homeowners may face the loss of their homes, even though the economy has improved.

Housing Wealth Effects and Mortgage Borrowing. The Effect of Subjective Unanticipated Changes in Home Values on Home Equity. Extraction in Denmark

In this paper we examine whether changes in home values drive mortgage-based equity extraction. To do this we use longitudinal survey data with subjective information about current and expected future home values to calculate unanticipated home value changes. We link this information at the individual level to high quality administrative records containing information about mortgage borrowing as well as savings in various financial instruments. We find that the marginal propensity to increase mortgage debt is 2-5 percent of unanticipated home value gains. We find no adjustment to other components of the portfolio, and we find that mortgage extraction leads to an increase in spending. The effect is driven by young households with high loan-to-value ratios which is consistent with the effect being driven by collateral constraints. Further, we find that the effect is driven by home owners who actively take out a new mortgage. The price effect is magnified among FRM borrowers who have an incentive to refinance their loans to lock in a lower market rate. These results point to the importance of the mortgage market in transforming price increases into spending and suggest that monetary policy can play an important role in transforming housing wealth gains into spending by affecting interest rates on mortgage loans.

Mortgage Debt, Hand-to-Mouth Households, and Monetary Policy Transmission

Using a representative sample of credit card holders from a Chinese commercial bank with a 10% credit card market share, we investigate how consumers respond to an unexpected interest rate decrease that automatically reduces interest expenses for all mortgagors in the country and thereby generates significant positive disposable-income shocks. Our difference-in-differences analysis shows that compared with homeowners without mortgage obligations, mortgagors increased their monthly credit card spending by 7.2% after the 230bps mortgage rate reduction announced in September 2008. We find a significant spending response both immediately after the announcement and during the post-reset period. The credit card delinquency rate also decreased after the mortgage rate reset. Subsequent to an interest-rate-increase episode, mortgagors symmetrically reduced their credit card spending. Hand-to-mouth consumers experienced a pronounced spending increase, even among those with a high credit limit, and their response was concentrated in the post-reset period. The debt-service channel plays an important role in transmitting monetary policy—our estimate implies a marginal propensity to consume (MPC) of 0.40-0.51 through credit card spending.

Competition and Appraisal Inflation

In mortgage debt contracts, real property serves as collateral and the terms of mortgage financing are largely conditional on the certification of collateral value by appraisers. However, overstatement of collateral value is common in the appraisal industry, causing troubles in the mortgage market as observed in the recent crisis. In this paper, we examine whether competition in the appraisal industry affects appraisal bias. We model appraiser behavior given a loan officer's preference for favorable appraisals (i.e. appraisal values at least as high as the transaction prices). As appraisers cater to loan officers to increase their probability of winning future business, our model predicts more inflated appraisals in more competitive markets. We confirm this prediction using a sample of purchase mortgages originated between 2003-2006 by a large subprime mortgage lender. Our results show that a one standard deviation increase in appraiser competition, measured at the MSA/year level, is associated with a 1.6-3.7 percentage point increase in the share of at-price appraisals. Furthermore, the effect is stronger in areas experiencing high house price growth.

Consumer mistakes and advertising: The case of mortgage refinancing

Does advertising help consumers to find the products they need or push them to buy products they don’t need? In this paper we study the heterogeneous effects of advertising on consumer mistakes in the market for mortgage refinancing and quantify the resulting overall effect on the net present value of mortgage debt. Mortgage borrowers frequently make costly refinancing mistakes by either refinancing when they should wait, or by waiting when they should refinance. We assemble a novel data set that combines a borrower’s exposure to direct mail refinance advertising and their subsequent refinancing decisions. Even though borrowers would lose on average $1229 by refinancing, the average monthly exposure of 0.13 refinancing direct mail advertisements reduces the expected net present value of mortgage payments on average by $7 each month, because borrowers who should refinance are targeted by advertisers and more responsive to advertising. A counterfactual advertising policy that redirects all advertising to borrowers who should refinance would increase the gain in borrower welfare to $36.

Between House and Home: Renovations Labor and the Production of Residential Value

In 2014, spending on home renovations across Canada outstripped spending on actual home purchases. In this article, I explore this rise in renovations spending through a case study of these dynamics in the Greater Toronto Area (GTA), a metropolitan region that has experienced extraordinary growth in both house prices and levels of household mortgage debt over the last decade. While cheap mortgage debt has often been considered a key factor facilitating housing exchange and speculation in recent decades, I highlight the significant role that informalized renovations labor has played in these housing market dynamics across the GTA. Combining secondary data on GTA housing sales and renovations activity with in-depth interviews with precarious renovations workers, I contend that renovating has been a key strategy to overcome the crisis of affordability produced by low-interest mortgage debt. Highlighting the central role of renovations labor in reproducing the home as a commodity with either new use or exchange values, I recast strategies of asset wealth-building and house buying in the GTA as ones highly reliant on de-skilled and informalized noncitizen renovations labor. Informed by intersectional feminist scholarship on paid but precarious labor in the home, I offer a partial perspective on the fundamental importance of precarious renovations labor to the political economy of private homeownership.

The Effects of Over-indebtedness on Individual Health

This paper uses data from the 2002-2005-2008 waves of the Spanish Survey of Household Finances (EFF) to investigate whether debts burdens hamper people's health. Several measures of debt strain are constructed, including debt-to-income ratios, the existence of debt arrears and amounts of outstanding debts. The paper also differentiates between mortgage and non-mortgage debts and explores the role of social norm effects in the debt-health relationship. The results, based on a random effects model extended to include a Mundlak term, show that non-mortgage debt payments and debt arrears affect significantly people's health. Furthermore, mild social norm effects are detected, according to which being less indebted than the reference group results, ceteris paribus, in better health.

I feel wealthy: A major determinant of Portuguese households’ indebtedness?

This paper examines the response of household debt to households’ perception of house prices using data from the first wave of the Household Finance and Consumption Survey. Whereas the literature has hitherto emphasized the effects of housing wealth on consumption, this study concentrates on the effects on debt accumulation—distinguishing mortgage debt from non-mortgage debt and inspecting over-indebtedness. Different measures of housing wealth are considered, controlling for tenure years. The findings reveal that the effects of housing wealth differ by type of loans and with the measure of housing wealth. Over-indebtedness is driven by the same factors that determine mortgage debt, suggesting a strong association between having outstanding liabilities from the primary residence and the risk of entering into default. Further estimations by different income and wealth classes revealed dissimilar housing wealth effects, with non-mortgage debt tending to rise among lower-income households and over-indebtedness tending to be larger among the wealthier.

Macroeconomic Determinants and Mortgage Debt Accumulation: Evidence from Malaysia

The statistics of the household debt in Malaysia is among the highest in the ASEAN region with the biggest portion of the household debt goes to pay off the mortgage debt. As accommodation is one of the basic needs required by all households regardless of the price offered, concerns are given to the household affordability to live in a decent economy. The escalating trend of household debts related to mortgage is due to the increase in house prices, fluctuation in interest rates and speculative activities taken by investors. Thus, the aim of the study is to examine the relationship of principal drivers on mortgage debt accumulation using macroeconomic determinants. The macroeconomic determinants were represented by house price index (HPI), interest rate (IR), gross domestic product (GDP) and living cost (LC). The data set was analyzed between the period of 2006 till 2016 on a quarterly basis. Multiple regression analysis was applied to test the statistical relationship between the macroeconomic determinants and the mortgage debt. Several diagnostic tests also being conducted to ensure that the proposed model in this study adequately describes the time series under consideration. The empirical findings revealed that the accumulation of mortgage debt in Malaysia is driven primarily by three key factors: house price index, interest rate, and living cost. The living cost has been identified as the most significant factor that leads to high accumulation of mortgage debt in Malaysia. However, income (which is represented by GDP) does not give any significant impact towards the accumulation of mortgage debt. This implies that capital appreciation in the property market has made households stretch out their mortgage financing to own a house to fulfill their basic needs; without considering their level of income. The implication of this study is critical to deliberate for further analysis as easy access to mortgage debt may lead to default or sub-prime crisis. By understanding the principal macroeconomic drivers that influence the accumulation of mortgage debt, this would contribute to the body of knowledge, and subsequently the legislator who can take the necessary actions to mitigate the issues of escalating prices in the property market, and how best to balance between the macroeconomic policy and the related policies designed to stabilize the housing market, and to contain the mortgage debt from upward bubbling.

The Impact of Adopting Corporate Social Responsibility on Corporate Financial Performance: Evidence From Italian Listed Companies

This paper aims to analyse whether social rating can impact on financial performance of major Italian companies listed on the stock exchange and, subsequently, whether the Italian stock market has proved awareness of social and environmental issues.The study will highlight how companies included in the Italian FTSE MIB index have reacted to the Subprime Mortgage and Sovereign Debt crises, opting for socially responsible investments. The analysis describes the stock exchange trend of the FTSE MIB index companies, considering the ethical rating assigned to them by Standard Ethics on a yearly basis, over a period ranging from 2007 to 2013.The results of the Panel Data analysis conducted on the chosen sample seek to explain whether an ethical rating is a discriminating variable for an investor, analysing the existence of a significant relationship between socially responsible investments of a listed company and its stock market performance.

When Junior Lien Zombie Loans Rise from the Dead: An Examination of Cure Rates

Junior lien mortgage debt proliferated during the housing market run up as borrowers used piggyback loans to buy homes or extract home equity. Defaulted second liens now trade in the distressed debt market at large discounts. In this paper, we examine the previously understudied second lien cure rate topic and find that the size and status of the associated senior mortgage are important cure rate predictors as are other borrower debt usage characteristics revealed in credit bureau data that includes borrowers' household debt. Results should be of interest to distressed debt investors, lenders, and policymakers alike.

De politiek van buy-to-let

Mounting concerns exist that small private investors exacerbate the urban housing crisis, by purchasing dwellings to rent out so-called ‘buy-to-let’ purchases. By buying up property, they may drive up house prices and exclude regular house-seekers. In this paper, we show that buy-to-let purchases constitute an increasing share of all purchases on the Dutch housing market, and especially so in larger cities and university cities. We argue these local trends do not emerge out of thin air and are not a ‘natural’ market process but should be considered the product of both global economic developments and national policies supporting these changes. Global developments include the increased mobility and ample availability of capital, exemplified by a prolonged low interest environment and a growing scarcity of high quality collateral and investment opportunities, making housing attractive for storing capital. Dutch housing policies have increasingly restricted access to social rent to low-income groups, while blowing up house prices fuelled with mortgage debts. As a consequence, a growing number of households falls in-between these two tenures: they have to resort to private rent. Private investors respond to and accommodate this demand through buy-to-let investments. Furthermore, the Dutch national government has made steps to relax regulation on the private-rental market and weakened tenant rights. In so doing, it sets the scene for amplifying social and spatial inequalities between the property rich and the property poor.

Credit constraints, house prices, and the impact of life cycle dynamics

How does the life cycle impact house price dynamics? This paper investigates how equilibrium house prices respond to a tightening in credit constraints under two different but similarly calibrated models: one an infinite-horizon setting and the other a life-cycle environment. The main conclusion is that house price dynamics are magnified by the presence of life cycle features. Two primary explanations stand out: the distinction between stocks and flows of mortgage debt in the cross-section and the importance of gross housing tenure flows, i.e. churn.

THE JANUS-FACED NATURE OF DEBT: RESULTS FROM A DATA-DRIVEN COINTEGRATED SVAR APPROACH

In this paper, we investigate the causal effects of public and private debts on US output dynamics. We estimate a battery of Cointegrated Structural Vector Autoregressive models, and we identify structural shocks by employing Independent Component Analysis, a data-driven technique which avoids ad-hoc identification choices. The econometric results suggest that the impact of debt on economic activity isJanus-faced. Public debt shocks have positive and persistent influence on economic activity. In contrast, rising private debt has a milder positive impact on gross domestic product, but it fades out over time. The analysis of the possible transmission mechanisms reveals that public debtcrowds inprivate consumption and investment. In contrast, mortgage debt fuels consumption and output in the short-run, but shrinks them in the medium-run.

Performing housing debt attachments: forming semi-financialised subjects

ABSTRACTThis article contributes to the understanding of how first-time buyers and their parents form attachments to housing debt. Interviews, carried out in the Czech Republic, with 40 first-time homebuyers and 10 with their parents were used to identify multiple layers of debt performativity. These layers consist of statements expressing moral evaluations and emotions; calculative and cognitive devices; and references to practices. Two arguments are advanced through a framework of layered performativity. The first argument concerns the subjectivities of debtors. Debtors adopt investment concepts in their statements and use calculative devices. However, by relying on familial moral orders of security and familial financial transfers, these debtors must be regarded rather as semi-financialised subjects. The second argument relates to the re-configuration of social and economic relations in families. Debt attachment endorses the use of intergenerational financial transfers, which in turn may enforce continued intra-familial reciprocity, both in terms of the recipients’ obligation to the providers of a gift or loan as well as concerning an obligation to help their children attain homeownership in the future. Finally, intergenerational transfers also transform the character of the mortgage market and mortgage debt, making informal debts an important part of formal debt circuits.

Historicizing housing typologies: beyond welfare state regimes and varieties of residential capitalism

Comparative housing scholars have, for many years now, imported typologies from non-housing spheres to explain housing phenomena. Notably, approaches attempting to account for divergent housing tenure patterns and trends have frequently been organized around typologies based on the assumption that a causal relationship exists between homeownership rates and the type of welfare regime or, more recently, the variety of residential capitalism a country exhibits. While these housing-welfare regime approaches have provided important research tools, we argue that the typologies they generate represent cross-sectional snapshots which offer little enduring cogency. Based on long-run data, we show that the postulated associations between homeownership, welfare and mortgage debt are historically contingent. This paper makes the case for employing historicized typologies, proposing a country-based typology linking historical housing finance system trajectories to urban form and tenure, with regional dimensions. We argue the need for typologies which can accommodate longitudinal, path-dependent dimensions, both within and between countries.