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Regulating Household Leverage

Author

Listed:
  • Stephanie Johnson

    (Northwestern University)

  • John Mondragon

    (Northwestern University)

  • Anthony DeFusco

    (Northwestern University)

Abstract

Despite the growing interest in policies that seek to constrain household leverage, there is only limited empirical evidence on how such policies affect the markets they intend to regulate. In this paper, we estimate how a central U.S. policy intended to reduce household leverage in the mortgage market—the Ability-to-Repay/Qualified Mortgage rule—affects the price, quantity, and anticipated performance of credit. Using a difference-in-differences strategy that exploits a policy-induced discontinuity in the legal liability associated with originating certain high-leverage mortgages, we estimate that the Ability-to-Repay/Qualified Mortgage rule led lenders to charge an additional 10-15 basis points per year to originate such loans. For the average affected borrower in our sample, this premium works out to roughly $1,700– 2,600 in additional interest over the typical life of a loan, or as much as $13,000–20,000 if held to maturity. By measuring the amount of bunching and missing mass near the discontinuity separating high- and low-leverage loans, we also estimate that the policy eliminated 2 percent of the affected segment of the market completely and led to a reduction in leverage for another 2.7 percent of loans. These estimates imply that when current exemptions expire and the policy is extended to the entire mortgage market, it will reduce the total volume of purchase mortgage originations by roughly $12 billion per year. Our estimates also suggest that these restrictions on leverage would have only modestly reduced the aggregate default rate during the housing crisis.

Suggested Citation

  • Stephanie Johnson & John Mondragon & Anthony DeFusco, 2017. "Regulating Household Leverage," 2017 Meeting Papers 327, Society for Economic Dynamics.
  • Handle: RePEc:red:sed017:327
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Bailey, Michael & D�vila, Eduardo & Kuchler, Theresa & Str�bel, Johannes, 2017. "House Price Beliefs And Mortgage Leverage Choice," CEPR Discussion Papers 12476, C.E.P.R. Discussion Papers.
    2. Cristian Badarinza, 2019. "Mortgage Debt and Social Externalities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 34, pages 43-60, October.
    3. Sedunov, John, 2020. "Small banks and consumer satisfaction," Journal of Corporate Finance, Elsevier, vol. 60(C).
    4. Marsha J. Courchane & Stephen L. Ross, 2019. "Evidence and Actions on Mortgage Market Disparities: Research, Fair Lending Enforcement, and Consumer Protection," Housing Policy Debate, Taylor & Francis Journals, vol. 29(5), pages 769-794, September.
    5. Sarena Goodman & Adam Isen & Constantine Yannelis, 2018. "A Day Late and a Dollar Short : Liquidity and Household Formation among Student Borrowers," Finance and Economics Discussion Series 2018-025, Board of Governors of the Federal Reserve System (U.S.).
    6. Andreas Fuster & Matthew Plosser & Philipp Schnabl & James Vickery, 2019. "The Role of Technology in Mortgage Lending," Review of Financial Studies, Society for Financial Studies, vol. 32(5), pages 1854-1899.
    7. Mark Garmaise & Yaron Levi & Hanno Lustig, 2020. "Spending Less After (Seemingly) Bad News," NBER Working Papers 27010, National Bureau of Economic Research, Inc.
    8. repec:bin:bpeajo:v:49:y:2019:i:2018-01:p:429-513 is not listed on IDEAS
    9. Neil Bhutta & Daniel R. Ringo, 2017. "The Effect of Interest Rates on Home Buying : Evidence from a Discontinuity in Mortgage Insurance Premiums," Finance and Economics Discussion Series 2017-086, Board of Governors of the Federal Reserve System (U.S.).
    10. 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.
    11. Andreas Fuster & Matthew Plosser & James Vickery, 2018. "Does CFPB oversight crimp credit?," Staff Reports 857, Federal Reserve Bank of New York.
    12. Lu Han & Chandler Lutz & Benjamin Sand & Derek Stacey, 2018. "Do Financial Constraints Cool a Housing Boom?," Working Papers 073, Ryerson University, Department of Economics.
    13. Benetton, Matteo & Bracke, Philippe & Cocco, João F & Garbarino, Nicola, 2019. "Housing consumption and investment:evidence from shared equity mortgages," Bank of England working papers 790, Bank of England.
    14. Jason Allen & Daniel Greenwald, 2018. "Managing a Housing Boom," 2018 Meeting Papers 1310, Society for Economic Dynamics.

    More about this item

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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