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HH-6: Household Debt
Housing consumption and investment: evidence from shared equity mortgages
1Haas School of Business, University of California, Berkeley; 2Financial Conduct Authority; 3London Business School; 4Bank of England
Academics have proposed hybrid products with equity features for the financing of housing. In spite of their risk-sharing benefits these products have not become mainstream. This paper studies an important exception, a UK government scheme which in the five years since its inception has provided almost £10 billion of equity financing. The analysis of the origination and prepayment behavior of households who have used the scheme highlights housing affordability constraints. A difference-in-difference analysis of an increase in the maximum government equity limit shows that households took advantage of the increase to buy more expensive properties, and not to reduce their mortgage debt and house price risk exposure. A counterfactual study of homebuyers who, instead of using the equity available, relied on high loan-to-value mortgages shows that their financing choices can be rationalized by an expected rate of house price appreciation of 7.7% per year. We draw general implications for how households approach their house purchase and financing decisions, taking advantage of the fact that the shared equity mortgages that we study allow the separation of the consumption and investment dimensions of housing.
The Real Effects of Secondary Market Trading Structure: Evidence from the Mortgage Market
Federal Reserve Board, United States of America
A vast majority of mortgages in the U.S. are securitized into agency mortgage-backed securities (MBS), many of which are traded in the to-be-announced (TBA) forward market. By allowing different MBS to be traded based on a limited set of characteristics, TBA market generates liquidity, with the aggregate daily trading volume second only to the U.S. Treasury market. In this paper, we quantify the effect of the unique secondary market trading structure on individual borrowers’ mortgage rates, demand for mortgages, and consumer spending. With a simple model, we show that the benefit of access to the TBA market is higher for loans with less desirable prepayment characteristics. Then, exploiting sharp discontinuities in the probability of a loan to be included in an MBS eligible for TBA delivery, we estimate that TBA eligibility reduces mortgage rates by 10–40 basis points, depending on the prepayment risk of the loan. Furthermore, we also provide evidence that TBA eligibility affects borrowers’ refinancing decisions and subsequent durable consumption.
Shale Shocked: The Long-Run Effect of Wealth on Household Debt
1University of Colorado Boulder, United States of America; 2Boston College, United States of America; 3University of Pennsylvania, Wharton School of Business, United States of America
We study the long-run effect of unanticipated income shocks on household debt. Specifically, we focus on how $14.6 Billion in oil and gas shale royalty payments over 11 years affect the balance sheets of 404,937 consumers. We find that initially-subprime consumers decrease their credit utilization by paying down pre-existing revolving debts, whereas prime consumers increase their mortgage and auto debts. Overall, household balance sheets become less risky (measured by credit scores), even though near-prime consumers have slight increases in delinquent and derogatory accounts. The effects are similar for consumers that reside inside or outside shale areas, which suggests that local exuberance about shale discovery does not provoke household over-indebtedness. Our findings highlight the role of heterogeneity in household balance sheets when considering how positive economic shocks affect future debt levels.
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