Research

In household finance markets, inactive households can implicitly cross-subsidize active households who promptly respond to financial incentives. We assess the magnitude and distribution of cross-subsidies in the mortgage market. To do so, we build a model of household mortgage refinancing and structurally estimate it on rich administrative data on the stock of outstanding mortgages in the UK. We estimate sizeable cross-subsidies from relatively poorer households and those located in less-wealthy areas towards richer households and those located in wealthier areas. Our work highlights how the design of household finance markets can contribute to wealth inequality. 

We analyze the distributional effects of macroprudential policy on mortgage cycles by exploiting the U.K. mortgage register and a 2014 15% limit imposed on lenders’ high loan-to-income (LTI) mortgages. Constrained lenders issue fewer and more expensive high-LTI mortgages, with stronger effects on low-income borrowers. Unconstrained lenders strongly substitute high-LTI loans in local areas with higher constrained lender presence, but not high-LTI loans to low-income borrowers—consistent with adverse selection problems—implying lower overall credit to low-income borrowers. Consistently, policy-affected areas experience lower house price growth postregulation and, following the Brexit referendum (negative aggregate shock), better house price growth and lower mortgage defaults for low-income borrowers.

This paper studies the spillover of a macroprudential regulation in Spain to the Mexican financial system via Mexican subsidiaries of Spanish banks. The spillover caused a drop in the supply of household credit in Mexico. Municipalities with a higher exposure to Spanish subsidiaries experienced a larger contraction in household credit. These localized contractions caused a drop in macroeconomic activity in the local non-tradable sector. Estimates of the elasticity of loan demand by the non-tradable sector to changes in household credit supply range from 1.2–1.8. These results emphasize cross-border effects of regulations in the presence of global banks.

We quantify the \textit{consumption channel} in mortgage demand according to which households borrow more in response to house price increases since housing and non-housing consumption are imperfect substitutes. To identify the consumption channel, we take a structural approach to mortgage demand and supply, exploiting exogenous variation in house price growth and a unique matched house price-mortgage data set. We feed our estimate of the elasticity of mortgage borrowing with respect to house prices of 0.82 into a counterfactual analysis of the general equilibrium of housing and mortgage markets. We find that without the consumption channel, mortgage borrowing in the UK would have increased by over 50\% less since the 1990s and house price growth would have been lower by 31%.