Mortgage Debt Research Articles

The Cost of Debt for REITs: The Mortgage Puzzle

Established, low-leverage equity REITs with access to the public debt market rely on both non-recourse mortgages and full recourse bonds/notes as sources of long-term debt. Interest rates on secured, non-recourse debt (mortgages) include a costly strategic default option premium and do not benefit from a firm’s overall financial capacity. We find that use of non-recourse, mortgage debt is more likely for longer-term, smaller borrowings, and during recessionary periods, consistent with REITs valuing financial flexibility in their capital structure. The higher rates for property-level debt suggest a benefit to REITs versus single asset investors in terms of cost of capital. Since REITs also access debt at the corporate level, the spread between long-term non-recourse debt and long-term recourse debt implies a benefit to the REIT structure.

Too much mortgage debt? The effect of housing financialization on housing supply and residential capital formation

AbstractThis article argues that the explosion of mortgage finance has not led to a proportional expansion of housing supply across 17 countries in a historical perspective (1913–2016). Based on a collection of housing construction data, it shows that the co-cyclical behavior of construction, prices and mortgage credit has been followed by a decoupling of house-price mortgage spirals from the underlying stagnating or declining construction activity since the 1980s. Mortgage debt is nonlinearly associated with new construction: positive up to a threshold, negative thereafter. The article argues that the increasing use of housing as an asset, or housing financialization, can explain why mortgages grow without construction, i.e. through privatization of state housing and supply restrictions as a result of rentier strategies of housing-market insiders and private developers. Private mortgage markets have thus been a less reliable policy alternative to traditional state-led housing construction policies. The article confirms for housing what has previously been found for growth or capital formation: beyond a certain threshold, there is a curse of too much finance.

Debt Stress and Debt Illusion: The Role of Consumer Credit, Reverse and Standard Mortgages.

This study examines the relationship of debt stress and reverse mortgage borrowing and compares it to stress from standard mortgages and consumer debt. Debt stress is measured as a self-reported response to the amount of debt. Using a unique national data set of 1,026 homeowners who chose whether to obtain a reverse mortgage in 2010, we estimate the relationship of 2014 levels of debt stress with various types of debt, assets, and income. Using an ordered probit model, we address the endogeneity of our measures of mortgage and consumer debt using an instrumental variables regression model. We found that consumer debt causes more stress per dollar of debt compared to mortgage debt. Reverse mortgages cause a relatively low level of stress per dollar of debt compared with standard mortgage debt. The average treatment effect of originating a reverse mortgage indicates statistically significantly higher probability of reporting no and not very much debt stress. Reverse mortgage debt causes a complex stress response. Stress per dollar of debt is lower for reverse than standard mortgages 4 years after origination. However, reverse mortgages' loan balance grows over time causing total stress to increase, while stress from a standard mortgage decreases as it is repaid. If an older adult uses reverse mortgage funds to repay consumer debt then total stress is reduced.

Geografías regionales y metropolitanas de la financiarización habitacional en Chile (1982-2015): ¿entre el sueño de la vivienda y la pesadilla de la deuda?

Through the process of financialization, neoliberal policies have turned social rights into debt. The Chilean case stands out in Latin American in that sense and it is argued that the early interpenetration of high finance—with the provision of housing—constitutes its true originality in addition to the already recognized subsidy to demand. Consequently, the objective of this article is to conduct a socio-spatial analysis of the regional and metropolitan geographies of mortgage debt between 1982 and 2015. For this, a dialectical logic is assumed, that emphasizes the description both in the creation and the adjustments that they have experienced, the mechanisms of financialization of the production of space and housing, as well as the process of massification of increased indebtedness in the period between 2004 and 2015. Finally, it is concluded that this massification corresponds to different subjects of debt and that the process of over-indebtedness raises questions about the possibility of future crises.

Debt matters? Mental wellbeing of older adults with household debt in England.

BackgroundA record number of older individuals have household debt, but little is known about possible links between debts and their mental wellbeing. This study examines the extent to which different aspects of household indebtedness predict mental wellbeing among this population.MethodsA sample of 17,091 individuals (72,700 observations) aged 50 and over in England was derived from waves 1–8 of the English Longitudinal Study of Ageing. Mental wellbeing was assessed by two outcome measures: number of depressive symptoms (CES-D 8) and quality of life (CASP-19 score). The predictors of mental wellbeing were examined using quartiles of non-zero overall debt amount, debt-to-income and debt-to-non-housing wealth ratios as alternative measures of debt burden. Linear regression models estimated the associations of mortgage and non-mortgage debt measures with mental wellbeing while adjusting for observable socioeconomic confounding factors. Individual fixed effect models were used to control for all time-constant factors among a longitudinal subsample.ResultsIndividuals in the highest debt-to-wealth quartile were particularly at risk of lower mental wellbeing, that is, a higher number of depressive symptoms and lower quality of life. After covariate adjustment, non-mortgage debt predicted lower mental wellbeing on both measures but mortgage debt was only linked to lower quality of life. Among the subsample who experienced changes in high non-mortgage debt levels, a small association of these changes with mental wellbeing outcomes were observed. Asymmetric within-individual estimation showed that both getting rid of and acquiring new debts during the study period predicted symmetrically (small) increases and decreases, respectively, in mental wellbeing.ConclusionThese findings indicate that among older individuals in England, non-mortgage debt status is linked to poor mental wellbeing. High, non-mortgage, debt-to-wealth ratios may help identify risk of mental wellbeing issues in older people with debts.

Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications

AbstractIn this paper, we use two comprehensive micro-data sets to study how the distribution of mortgage debt evolved during the 2000s housing boom. We show that the allocation of mortgage debt across the income distribution remained stable, as did the allocation of real estate assets. Any theory of the boom must replicate these facts, and a general equilibrium model shows that doing so requires two elements: (1) an exogenous shock that increases expected house price growth or, alternatively, reduces interest rates and (2) financial markets that endogenously relax borrowing constraints in response to the shock. Empirically, the endogenous relaxation of constraints was largely accomplished with subprime lending, which allowed the mortgage debt of low-income households to increase at the same rate as that of high-income households.

Credit expansion and socio-economic heterogeneity of debtors in foreclosure: the case of Sweden 2000–2014

Credit expansion is the trend of households gaining access to more credit. It is correlated with increasing socio-economic heterogeneity of indebted homeowners. Increasing heterogeneity implies that a more diverse span of homeowners is put at risk of foreclosure. This empirical study explores socio-economic heterogeneity in the case of Swedish debtors in foreclosure between 2000 and 2014. Employing individual-level data, the study observes variability over time for socio-economic variables within and between three groups of debtors with mortgage, consumer, and tax debt, respectively. The results indicate that there were trends towards increasing socio-economic heterogeneity within these three groups and that these trends were particularly strong among the group with mortgage debt. For the mortgage debt group, a greater number of socio-economically weak debtors entering foreclosure over time drives increasing heterogeneity. The discussion focuses on the role of increasing scope—access to credit for previously excluded households—and increasing scale—more access to credit generally—in explaining these findings.

Financialization, household debt and income inequality: Empirical evidence

AbstractThe aftermath of the most recent financial crisis has prompted a surge of interest in the impact of finance capitalism on national economies and individual livelihoods. Yet, research on the impact of financialization on income inequality, remains scant and inconclusive. Using data for 33 countries over 1996–2015, we provide evidence that of the three financialization dimensions ‐ of the financial, nonfinancial and household sectors ‐ only household financialization exerts a positive and robustly significant impact on income inequality. Re‐estimations by system generalized‐methods‐of‐moments (SYS‐GMM) and difference‐GMM as well as alternative income inequality measures, confirm the significant, positive impact of household indebtedness over all other financialization dimensions. Following disaggregation of household financialization into its three main components (mortgage, consumer and other purposes debt), we also uncover that it is increasing levels of household debt aimed at sustaining living standards that is accountable for the positive impact on income inequality, whilst mortgage debt reduces it.

Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation

AbstractWe introduce multiperiod mortgage loans, fixed interest rate, a lower bound constraint on newly granted loans, and a possibly slack collateral constraint, in an otherwise standard Dynamic Stochastic General Equilibrium (DSGE) model with housing. Our nonlinear estimation shows that all those features are important to understand the evolution of mortgage debt during the recent U.S. housing market boom and bust. The transmission of monetary policy becomes dependent on the housing cycle, with weaker effects when house prices are high or start falling sharply. Higher average loan duration makes monetary policy less effective, eventually leading to asymmetric responses to positive and negative monetary shocks.

Modelling Wealth Effect in Consumption Function Based on System of National Acounts (SNA) Data

The study explores the influence of housing wealth, as well as other wealth variables, on consumption in the frame of permanent income lyfe cycle theory. The sample are three former socialist countries and the model used was based on models initially developed for advanced economies, most notably Norway and the Netherlands. The paper, based, where necessary, on a compiled data set, uses a more complete list of variables than similar studies and relies on comparative analysis to come to plausible results and interpret them. The results differ from those obtained in other studies for the same or similar type of countries or even the same economies, and that is that movements in values of housing stock does not influence consumption of households. In addition, the paper explains why housing wealth is not part of consumption function in former socialist countries with certain macroeconomic structure, and that is low part of unpaid mortgage debt in the financing structure of housing wealth. The reason is that mortgage financing causes the price movements of housing wealth to influence consumption, especially in developed countries where workforce is highly mobile.

Over-indebtedness and age: The effects on individual health

This paper uses longitudinal data from the Spanish Survey of Household Finances to investigate the relation between household situations of over-indebtedness and self-assessed health by age. The interest of the Spanish case relies on the increased indebtedness of Spanish families after the 2008 Global Crisis. The paper differentiates between mortgage and non-mortgage debts and between young and middle-aged and old individuals. We rely on Deb and Trivedi's (2006) method to account for the endogeneity of self-assessed health and over-indebtedness simultaneously. The paper shows that being over-indebted in mortgage debts is associated with lower self-assessed health among middle-aged and old individuals. However, among young individuals, this detrimental health effect only appears when the situation of over-indebtedness is due to both mortgage and non-mortgage debts.

Taxes and Borrower Behavior: Evidence from the Mortgage Interest Deductibility Limit

This paper estimates the behavioral response to mortgage interest tax deductibility by studying the discrete change in the net-of-tax marginal interest rate that occurs at $1 million in mortgage debt. Using data on 2004-2016 mortgage originations, I estimate excess bunching in the loan distribution based on a counterfactual that accounts for bunching at salient loan amounts. Findings suggest excess of about 54,000 loans at the deductibility limit, or 4.5% of the sample. The level of bunching implies an average reduction in borrowing around the $1 million limit of 9.4 percent, and mortgage demand elasticities between − 0.132 to − 0.115 for home purchase loans. Estimated elasticities imply that from 2004-2016 the MID induced $49.52 billion in deadweight loss in the mortgage market.

Similar Origins – Divergent Paths: The Politics of German and Dutch Housing Markets

This article is a comparative study of Dutch and German housing markets. Until the early 1990s, the two housing markets shared many commonalities, both in terms of their specific characteristics and the larger political, economic, and institutional contexts in which they were embedded. Since the 1990s, in contrast, the two housing markets have diverged significantly; with home ownership, mortgage debt and housing prices much higher in the Netherlands than Germany. We explain this divergence, first, by pointing out the more extensive turn to neoliberalism in housing policy in the Netherlands than in Germany. Second, we look at the differences in the treatment of private renting versus not-for-profit social housing by governments in each country. Third, we draw attention to mortgage liberalisation after 1993 in the Netherlands, which did not happen in Germany, and the treatment of fiscal subsidies for home ownership. This paper contributes to the debate on varieties of residential capitalism and stresses that housing patterns diverge even among countries with the same welfare state typologies and similar rental markets.

House Price Shocks, Credit Constraints and Household Indebtedness

AbstractWe analyse the effect of housing wealth on household indebtedness in a life-cycle framework. Exploiting longitudinal household data and temporal and geographic variation in house prices, our empirical results indicate that households respond to increases in housing wealth by significantly increasing their debt. The effect is strongest for households that are moderately leveraged, highlighting the importance of collateral constraints. Furthermore, we uncover a weaker wealth effect from house price growth for households that have faced negative shocks to income or employment. Importantly, our findings are consistent with the theoretical predictions of the life-cycle model: households increase their mortgage debt, but not their unsecured credit card debt. A novel finding is that we uncover a moderate positive wealth effect on investment loans.

It takes two to tango: mortgage markets, labor markets and rising household debt in Europe

Household mortgage debt unleashed devastating consequences for the global economy in 2007–2008. Despite the growing importance of household debt in financial markets, international political economy and comparative political economy have not theorized why it varies so much across Europe. We argue that variation in household debt can be explained by the intersection of two domestic institutions: labor market institutions (and by extension the welfare state) that enable households to withstand negative employment/income shocks, and mortgage finance institutions that govern households’ credit access. We empirically demonstrate via a panel analysis of 17 advanced capitalist democracies that the impact of these institutions on household debt is co-dependent. Strong collective bargaining institutions (and generous welfare states), which protect borrowers from income and employment insecurity, are associated with higher household indebtedness, but only if housing finance institutions that encourage mortgage lending are present (i.e. in Scandinavia and the Netherlands). In contrast, liberal (financialized) economies have comparatively lower household indebtedness because their labor market institutions inhibit income security for borrowers. As household debt becomes more central to comparative political economy, our findings suggest that scholars who study financialization need to integrate labor market (and welfare state) institutions into their analysis to understand how domestic financial systems function.

Housing Wealth or Collateral: How Home Value Shocks Drive Home Equity Extraction and Spending

Abstract We examine whether unanticipated changes in home values drive spending and 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 3%–5% 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 fixed rate mortgage (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.

Housing Wealth or Collateral: How Spending and Home Equity Extraction Respond to Unanticipated Housing Wealth Gains

We examine whether unanticipated changes in home values drive spending and 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 3-5 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.

Legal Versus Psychological Contracts: When Does a Mortgage Default Settlement Contract Become a Contract?

This study increases understanding of the mortgage default settlement process by examining how borrowers make decisions during contract negotiations. We explore two main research questions: (1) Do borrowers experience a difference between psychological and legal contracts? and (2) Does inequity aversion, or the dislike of being taken advantage of, influence the willingness of a borrower to withdraw from a mortgage default settlement contract? Our findings suggest borrowers do not conflate legal versus psychological contracts in this setting, a result which contradicts previous research findings. Moreover, as defaulting borrowers appear to place relatively little value on a clean credit report, they do not differentially enter/withdraw from contract negotiations based on a lender’s unwillingness/inability to clear their credit report. These findings, which run counter to conventional wisdom, may well reflect the emerging divide in the U.S. between individuals and large institutions. Specifically, borrowers do not appear to trust lending institutions, nor do they seem to care deeply about conventional underwriting and risk signaling metrics such as credit reports. Thus, in order to successfully and optimally resolve the voluminous magnitude of outstanding, toxic mortgage debt, a revolutionary new approach to negotiating with borrowers that reflects these new norms must be considered. Examination of a second dataset suggests these results are based on the cultural and legal environment in the U.S., and therefore may not be generalizable to other countries.

Mexico’s Housing Paradox: Tensions Between Financialization and Access

ABSTRACT The main aim of this article is to analyze the participation of different government levels and institutions in promoting the financialization of housing in Mexico. Furthermore, it examines some of the implications of following this logic, particularly at the local and household levels, such as surmounting mortgage debt, the clustering of vacant and abandoned housing, and, ultimately, the reproduction of poor housing conditions. Since the late 1990s, millions of households have acquired mortgages to buy homes in the periurban fringes of Mexican cities. Such new sprawling housing developments, however, have offered limited access to economic opportunities, and have imposed a significant burden on local governments to provide infrastructure and services. Many families have also seen their mortgage debt increase, forcing many of them to leave their dwellings behind. By 2010, Mexico had the highest vacancy rate among member countries of the Organisation for Economic Co-operation and Development, and about a third of Mexicans still live in precarious housing conditions. Such paradoxical coexistence, I argue, exposes a tension between the financialization of and the right to housing, and the extent to which the former has trumped the latter.

Exploring the rise of mortgage borrowing among older Americans

Between 1980 and 2015, older households in the US more than tripled the use of home mortgage debt. Rather than using owned homes as a source of imputed rent, older households are borrowing against home equity, with loan terms that exceed their expected life spans. Using several data sources, we explore the rising use of mortgages among elderly homeowners. Rising mortgage borrowing provides low-wealth older households with increased liquid assets, but it does not appear to be meaningfully associated with increases in loan defaults. This trend of elderly mortgage borrowing is not explained by increasing levels of income or cohort demographic shifts, but is linked to a rise on ownership of homes by older households in general. However, changes in subsidies associated with mortgage debt partially contribute to differential increases in mortgage use by older households.