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Cross-sectional patterns of mortgage debt during the housing boom: evidence and implications

Author

Listed:
  • Foote, Christopher L.

    () (Federal Reserve Bank of Boston)

  • Loewenstein, Lara

    () (Federal Reserve Bank of Boston)

  • Willen, Paul S.

    () (Federal Reserve Bank of Boston)

Abstract

The reallocation of mortgage debt to low-income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom. We show that such a reallocation never occurred, as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly. Moreover, because mortgage debt varies positively with income in the cross section, equal percentage increases in debt among high- and low-income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms. Previous research stressing the importance of low-income borrowing was based on the inflow of new mortgage originations alone, so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time. And while defaults on subprime mortgages played an important part in the financial crisis, the data show that subprime lending did not cause a reallocation of debt toward the poor. Rather, subprime lending prevented a reallocation of debt toward the wealthy.

Suggested Citation

  • Foote, Christopher L. & Loewenstein, Lara & Willen, Paul S., 2016. "Cross-sectional patterns of mortgage debt during the housing boom: evidence and implications," Working Papers 16-12, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:16-12
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Stefania Albanesi, 2016. "Credit Growth and the Financial Crisis: A New Narrative," 2016 Meeting Papers 575, Society for Economic Dynamics.
    2. Shai Bernstein & Timothy McQuade & Richard R. Townsend, 2017. "Does Economic Insecurity Affect Employee Innovation?," NBER Working Papers 24011, National Bureau of Economic Research, Inc.
    3. Giovanni Violante, 2017. "Comment on "Dynamics of Housing Debt in the Recent Boom and Bust"," NBER Chapters,in: NBER Macroeconomics Annual 2017, volume 32 National Bureau of Economic Research, Inc.
    4. Aaron Hedlund & Carlos Garriga, 2016. "Mortgage Debt, Consumption, and Illiquid Housing Markets in the Great Recession," 2016 Meeting Papers 1564, Society for Economic Dynamics.
    5. Martino, Ricci & Patrizio, Tirelli, 2017. "Subprime Mortgages and Banking in a DSGE Model," Working Papers 366, University of Milano-Bicocca, Department of Economics, revised 22 Jun 2017.
    6. Michael Bailey & Eduardo Dávila & Theresa Kuchler & Johannes Stroebel, 2017. "House Price Beliefs And Mortgage Leverage Choice," NBER Working Papers 24091, National Bureau of Economic Research, Inc.
    7. Gete, Pedro & reher, Michael, 2017. "Mortgage Supply and Housing Rents," MPRA Paper 82856, University Library of Munich, Germany.
    8. Kaplan, Greg & Mitman, Kurt & Violante, Giovanni L., 2017. "The Housing Boom and Bust: Model Meets Evidence," CEPR Discussion Papers 12215, C.E.P.R. Discussion Papers.
    9. Nelson Lind, 2017. "Credit Regimes and the Seeds of Crisis," 2017 Meeting Papers 1474, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E03 - Macroeconomics and Monetary Economics - - General - - - Behavioral Macroeconomics
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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