How Do Mortgage Refinances Affect Debt, Default, and Spending? Evidence from HARP (with Andreas Fuster; AEJ: Macroeconomics, 2021)
We use quasi-random access to the Home Affordable Refinance Program (HARP) to identify the causal effect of refinancing into a lower-rate mortgage on borrower balance sheet outcomes. Refinancing substantially reduces borrower default rates on mortgages and other debt. Refinancing also causes borrowers to expand their use of debt instruments, such as auto loans, home equity lines, and other consumer debts that are proxies for spending. Borrowers that appear more constrained ex ante grow these debts more strongly after refinancing but also pay down credit card balances by more. These borrowers also have lower take-up of the refinancing opportunity.
The Measurement and Behavior of Uncertainty: Evidence from the ECB Survey of Professional Forecasters (with Robert Rich, Joseph Song, and Joseph Tracy; Journal of Applied Econometrics, 2016)
We examine matched point and density forecasts of output growth, inflation and unemployment from the ECB Survey of Professional Forecasters. We construct measures of uncertainty from individual histograms, and find that the measures display countercyclical behavior and have increased across all forecast horizons since 2007. We also derive measures of forecast dispersion and forecast accuracy, and find that they are not reliable proxies for uncertainty. There is, however, evidence of a meaningful co‐movement between uncertainty and aggregate point predictions for output growth and unemployment. These results are robust to changes in the composition of the survey respondents over time.
Equilibrium Mortgage Design with Heterogeneous Borrowers (working paper)
Conventional mortgages penalize “unsophisticated” borrowers for their failure to refinance. This paper shows that the absence of mortgages that better serve such borrowers – for instance by including an automatic refinancing provision – can be rationalized as a strategy by lenders to extract rents. Conventional mortgages allow lenders to charge a high effective price of credit to unsophisticated borrowers who are less likely to shop around during mortgage origination, than to sophisticated borrowers. An automatic refinancing provision would eliminate this price discrimination and lower rents, explaining why it is not offered. Prepayment penalties and “points” also impact the price discrimination mechanism. The baseline calibration of the paper’s model predicts that lenders should offer to pay points to borrowers at origination and not include prepayment penalties, consistent with what is observed in most market segments in recent decades. A policy of taxing borrowers for refinancing would benefit the unsophisticated by lowering interest rates and, potentially, leading to a change in mortgage designs that lenders offer.
Mortgage Lock-In and Home Sales Volume Dynamics (working paper)
The recent increase in interest rates has substantially reduced home-selling. This paper considers the dynamic problem of a household with the dual options to move and to refinance in a model where interest rates and idiosyncratic housing match quality are both stochastic. The model admits the possibility of ``lock-in," whereby households reduce their likelihood of sale in the face of high mortgage interest rates. A calibrated version of the model is used to analyze the dynamics of home sales moving forward and the impacts of proposed policies. While the impact depends on the future conduct of monetary policy, the model predicts that a tax credit for home-sellers would likely increase economic efficiency, but it would require roughly $40 of government expenditure for every $1 of social surplus created, since many moves would occur even in the absence of the subsidy. Therefore, such a subsidy is in large part simply a transfer to homeowners and their lenders.
The Home Sales Volatility Puzzle: An Empirical Exploration (working paper)
The recent housing cycle in the United States saw a large swing not only in home prices but in the number of home sales as well. This uses a comprehensive dataset on US home sales to investigate two popular explanations for the cyclicality of selling activity: “house lock,” whichconjectures that falling prices cause down-payment constraints to bind and prevent current homeowners from selling their homes; and nominal loss aversion, which proposes that cognitive frictions prevent homeowners from selling when doing so would not garner a price as high asthe one they originally paid for the house. I find that while there is evidence that both of these mechanisms are active at the household level, they explain a fairly small portion of the decline in sales from boom to bust: likely no more than 10%.