Many studies have addressed the question of why people default on their mortgages, but lack of data has meant that much of this research has omitted the effect of the owner's ability to pay. This column uses panel data on defaults and changes in income to show that ability to pay is a much more important determinant of default than previously recognised. If the head of household loses a job, for example, this is equivalent to the effect of a 35% drop in home equity. Policies targeted at increasing ability to pay may be more effective at reducing default than those that try to remedy negative equity.
Kristopher S. Gerardi, Kyle Herkenhoff, Lee Ohanian, Paul S. Willen, 10 January 2017
Claire Célérier, 05 December 2016
What are the drivers of complexity? In this video Claire Célérier explains the implications of complexity for investors. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
Christopher Woolard, 28 November 2016
Can consumers make effective choices in the mortgage market? In this video, Christopher Woolard discusses key issues for regulators. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
, 25 November 2016
Who would benefit from interventions in the mortgage market? In this video, Steffen Andersen highlights the differences between the UK and Danish markets. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
Tarun Ramadorai, 18 November 2016
Consumers are at the heart of the mortgage market. In this video, Tarun Ramadorai discusses the constraints household might face when taking mortgages. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
Peter Andrews, 14 November 2016
Is the mortgage market working well? In this video, Peter Andrews discusses possible interventions when markets are failing. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
Nancy E. Wallace, 11 November 2016
There have been changes in the way individuals buy or rent houses. Nancy Wallace explains the role of mortgages and how they should be funded. This video was recorded at the Brevan Howard Centre for Financial Analysis in October 2016.
Janine Aron, John Muellbauer, 31 August 2016
Mortgage delinquencies and foreclosures have serious implications, not just for the households affected, but for the financial stability of the economy. The solvency of the mortgage lenders is affected, and their ability to extend credit. This column identifies three key drivers of delinquency and foreclosure rates in the UK – the debt service ratio, the proportion of homes in negative equity, and the unemployment rate – and compares the rates with those in the US. It also discusses the data constraints that have hindered previous analyses.
Sumit Agarwal, Gene Amromin, Souphala Chomsisengphet, Tomasz Piskorski, Amit Seru, Vincent Yao, 01 October 2015
Mortgage refinancing is one of the main ways households can benefit from a decline in the cost of credit. This column uses the US Government’s Home Affordable Refinancing Program (HARP) as a laboratory to examine the government’s ability to impact refinancing activity and spur household consumption. The results suggest that less creditworthy borrowers significantly increase their spending following refinancing. The authors provide comprehensive evidence that competitive frictions in intermediation sector prevented a large number of such eligible borrowers from benefiting from the programme. To the extent that such borrowers have the largest marginal propensity to consume, allowing them to refinance under the programme could increase overall consumption and alleviate uneven economic outcomes across the country.
Charles Goodhart, Philipp Erfurth, 03 November 2014
There has been a long-term downward trend in labour’s share of national income, depressing both demand and inflation, and thus prompting ever more expansionary monetary policies. This column argues that, while understandable in a short-term business cycle context, this has exacerbated longer-term trends, increasing inequality and financial distortions. Perhaps the most fundamental problem has been over-reliance on debt finance. The authors propose policies to raise the share of equity finance in housing markets; such reforms could be extended to other sectors of the economy.
Karl Walentin, 11 September 2014
Central banks have resorted to various unconventional monetary policy tools since the onset of the Global Crisis. This column focuses on the macroeconomic effects of the Federal Reserve’s large-scale purchases of mortgage-backed securities – in particular, through reducing the ‘mortgage spread’ between interest rates on mortgages and government bonds at a given maturity. Although large-scale asset purchases are found to have substantial macroeconomic effects, they may not necessarily be the best policy tool at the zero lower bound.
Denis Fougère, Mathilde Poulhès, 01 December 2012
Faltering housing markets have been central in exacerbating the global crisis and in prolonging its lacklustre recovery. This column warns that similar troubles may lie ahead. In examining the complex interactions between housing investments and stock market investments, evidence suggests that an increase in housing values reduces equity holdings. This correlation is important, and potentially problematic, because housing values are currently creeping back towards pre-crisis levels in many Western economies.
Sergi Jiménez-Martín, Hugo Benítez-Silva, Selcuk Eren, Frank Heiland, 30 June 2009
How did we get a housing bubble? This column describes how well households predict the market values of their homes. Most homeowners overestimate the value of their properties by 5% to 10%, primarily due to the large expected capital gains implicit in the self-reported home values. Overly optimistic expectations about the evolution of house prices may have planted the seed of the current mortgage crisis in the US.
Riccardo Cesari, 18 October 2008
This column argues that current bailout plans do not address the roots of the crisis. It advocates a significant re-regulation of financial markets and assistance to households unable to manage their real estate debt.
Daniel Gros, 27 September 2008
How much are the toxic assets worth? A bit of logic and a straightforward application of the Black-Scholes formula suggests that if current expectations of house price declines are right, securities built on subprime mortgages might be close to worthless. The key is that US mortgages are ‘no recourse’ loans, i.e. debtors can walk away from the mortgage without being held personally liable, a feature that gives homeowners a virtual put option.
Daniel Cohen, 03 June 2008
What easy money brought forth in the new century, tight credit will take away in the years to come. Here one of France’s leading economists explains the origins of the subprime crisis and why it is likely to continue to unfold.
Giovanni Dell'Ariccia, Deniz Igan, Luc Laeven, 04 February 2008
Over the last decade, the market for mortgage-backed securities has expanded dramatically, evolving from a small niche segment to a major portion of the overall U.S. mortgage market. The authors of CEPR DP6683 study the relationship between this recent boom and current delinquencies in the subprime mortgage market. Specifically, they analyze the extent to which this relationship can be explained by a decline in credit standards and excessive risk taking by lenders that is unrelated to improvements in underlying economic fundamentals.
Charles Wyplosz, 16 August 2007
A basic principle of high uncertainty is to be careful. This principle also applies to analyses of the situation, even if decisiveness in the face of turmoil is at a premium. Better wait than make things worse. Here a few observations to sort through the emerging debate.