Recent work
The Rise in Mortgage Fees: Evidence from HMDA Data, with Neil Bhutta.
Although rising mortgage interest rates between 2022 and 2023 captured headlines, the cost of upfront mortgage fees also increased significantly during that time. Using new Home Mortgage Disclosure Act data on fees, collected since 2018, we estimate that borrowers’ out-of-pocket upfront costs for getting a home purchase mortgage rose nearly 33 percent from 2021 to 2023, to almost $6,500. We document that the main driver of this increase has been rising payments of “discount points,” as opposed to other types of lender fees and third-party fees. We show that loans originated by nonbanks, in particular, have seen large increases in discount points and yet also carry the highest interest rates, on average, after accounting for borrower and loan traits that influence risk premia.
How Resilient Is Mortgage Credit Supply? Evidence from the COVID-19 Pandemic, with Andreas Fuster, Aurel Hizmo, James Vickery, and Paul Willen
Revise and Resubmit at Journal of Finance
We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.
Published Work
Can Everyone Tap Into the Housing Piggy Bank? Racial Disparities in Access to Home Equity, with Jim Conklin and Kris Gerardi
Journal of Financial Economics
During the 2018–2021 period, Black homeowners’ mortgage equity withdrawal (MEW) product applications were rejected at almost double the rate of White homeowners (44% versus 23%), while Hispanic and Asian homeowners also experienced significantly higher denial rates (32% and 30%, respectively). These racial disparities in denials are much larger than those associated with purchase and rate/term refinance mortgage applications. Controlling for loan and borrower characteristics commonly used in the underwriting process significantly reduces the MEW disparities, with the Black-White denial rate gap falling by approximately 83%, and the Hispanic-White gap falling by 73%. Credit scores and debt-to-income ratios are the most important factors explaining the racial gaps, while differences in loan-to-value ratios contribute only modestly. Large disparities remain after controlling for underwriting factors, and these “residual” disparities vary significantly across lenders. While there are numerous potential drivers of the residual disparities, the paper shows that they tend to be larger in geographic areas characterized by more racial animus, which suggests that discriminatory forces may play a role.
Fintech Lending and Mortgage Credit Access, with Julapa Jagtiani and Tim Lambie-Hanson
Journal of FinTech
Following the 2008 financial crisis, mortgage credit tightened and banks lost significant mortgage market share to nonbank lenders, including to fintech firms recently. Have fintech firms expanded credit access, or are their customers similar to those of traditional lenders? Unlike in small business and unsecured consumers lending, fintech mortgage lenders do not have the same incentives or flexibility to use alternative data for credit decisions because of stringent mortgage origination requirements. Fintech loans are broadly similar to those made by traditional lenders, despite innovations in the marketing and the application process. However, nonbanks market to consumers with weaker credit scores than do banks, and fintech lenders have greater market shares in areas with lower credit scores and higher mortgage denial rates.
Appraising Home Purchase Appraisals, with Paul Calem, Jeanna Kenney, and Leonard Nakamura
Real Estate Economics
Home appraisals are produced for millions of residential mortgage transactions each year, but appraised values are rarely below the purchase contract price: Some 30% of appraisals in our sample are exactly at the home price (with less than 10%of them below it). We lay out a basic theoretical framework to explain how appraisers’ incentives within the institutional framework that governs mortgage lending lead to information loss in appraisals (that is, appraisals set equal to the contract price). Consistent with the theory, we observe a higher frequency of appraisal equal to contract price and a higher incidence of mortgage default at loan-to-value boundaries (notches)above which mortgage insurance rates increase. Appraisals appear to be less informative for default risk measurement compared with automated valuation models.
Institutional Investors and the U.S. Housing Recovery, with Wenli Li and Michael Slonkosky
Real Estate Economics
We study the house price recovery in the U.S. single-family residential housing market since the outbreak of the mortgage crisis, which, in contrast to the preceding housing boom, was not accompanied by a rise in homeownership rates. Using comprehensive property-level transactiondata, we show that this phenomenon is largely explained by the emergence of institutional investors. By exploiting heterogeneity in a county’s exposure to local lending conditions and to government programs that affected investors’ access to residential properties, we estimate that the increasing presence of institutions in the housing market explains over half of the increase in real house price appreciation rates between 2006 and 2014. We further demonstrate that institutional investors contribute to the improvement of the local housing market by reducing vacancy rates as they shorten the amount of time distressed properties stay in REO. Additionally, institutional investors help lower local unemployment rates by increasing local construction employment. However, institutional investors are responsible for most of the declines in the homeownership rates.
Institutions and Geographic Concentration in VA Mortgage Lending, with Kerry Spitzer
Cityscape, 2020, 22(1): 75-102
The U.S. Department of Veterans Affairs (VA) home loan guaranty program lowers the cost of homeownership for veterans and their families by removing the barriers of a downpayment and private mortgage insurance. Even with the recent growth in the program and the attractive terms, many veteran homeowners have not used it. As a consequence, some areas of the country with large numbers of veterans have disproportionately few VA loan originations, even after controlling for area housing market conditions. We explore the role of institutions in explaining the disproportionate concentration of loan originations in county-level Home Mortgage Disclosure Act (HMDA) data, and we test whether the presence of military installations, VA facilities, and veterans service organization (VSO) posts within each county contributes to lending patterns. We find that close proximity to a military site is a strong positive predictor of county-level rates of VA mortgage lending, even after controlling for the number of veterans and servicemembers living in the area.
Is the Community Redevelopment Act Still Relevant to Mortgage Lending? with Paul Calem and Susan Wachter
Housing Policy Debate, 2020, 30(1): 46-60.
The market share of conforming-size, home purchase mortgage originations has shifted from banking institutions to nonbank lenders. In 2017, nonbanks originated more than 1.8 million purchase mortgages (53% of the market), compared with 1.4 million by banks. Nonbanks originated 30% of purchase-money mortgages in 2000 and 24% in 2007. Does the declining role of banking institutions imply that the Community Reinvestment Act (CRA) is becoming less relevant to mortgage lending, since only they are subject to the requirements of the CRA? We address this question by exploring the changing composition of home purchase mortgage originations since 2000. We focus on the share of FHA and conforming-sized conventional loans to low- or moderate-income (LMI) households or to finance properties in LMI neighborhoods, and provide a more detailed examination of shifts in market composition than previous studies. Our analysis suggests that the CRA continues to be relevant to maintaining broad access to mortgage credit. We find that the overall share of loans to LMI borrowers has decreased compared with pre-2004, which we view as a reasonable benchmark period. However, this decrease has mostly been offset by an increased share to borrowers (broadly distributed by income) purchasing properties in LMI neighborhoods.
Stuck in Subprime? Examining the Barriers to Refinancing Mortgage Debt, with Carolina Reid
Housing Policy Debate, 2018, 28(5): 770-796.
Despite falling interest rates and federal policy intervention, many borrowers who could financially gain from refinancing have not done so. We investigate the rates at which, relative to prime borrowers, subprime borrowers seek and take out refinance loans, conditional on not experiencing mortgage default. We find that starting in 2009, subprime borrowers are about half as likely as prime borrowers to refinance, although they still shop for mortgage credit, indicating their interest in refinancing. This disparity is driven in part by the tightened credit environment postfinancial crisis, and the fact that many subprime borrowers were ineligible for the Home Affordable Refinance Program (HARP). In addition, we find that refinance rates have been significantly lower for black and Hispanic borrowers, even after controlling for borrower credit status. We argue that these barriers to refinancing for subprime borrowers have long-term implications for social stratification and wealth building.
Agency and Incentives: Vertical Integration in the Mortgage Foreclosure Industry, with Timothy Lambie-Hanson
Review of Industrial Organization, 2017, 51(1): 1-24.
We empirically test whether processing times differ for law firms that integrate the foreclosure auction process compared to law firms that contract with independent auction companies. We find that unintegrated firms are able to initially schedule auctions more quickly, but when postponements occur, are no faster to adapt. Since firms schedule the initial auction before contracting, unintegrated auction companies have an incentive to conform to the law firms’ schedules in order to secure the contract. Alternatively, if the auction is postponed, rescheduling occurs after contracting, and unintegrated auction companies no longer have a greater incentive to reschedule quickly. Since processing time is an important measure in this industry, that integrated firms generate longer initial scheduling durations is evidence of a penalty from integrating. These findings lend support to the property rights argument that when rights of control are allocated to parties with poor incentives, costs to vertical integration may exist.
A Cost-Benefit Analysis of Judicial Foreclosure Delay and a Preliminary Look at New Mortgage Servicing Rules, with Larry Cordell
Journal of Economics and Business, 2016, 84: 30-49.
Since the start of the financial crisis, we have seen an extraordinary lengthening of foreclosure timelines, particularly in states that require judicial review to complete a foreclosure but also recently in nonjudicial states. Our analysis synthesizes findings from several lines of research, updates results, and presents new analysis to examine the costs and benefits of judicial foreclosure review. Consistent with previous studies, we find that judicial review imposes large costs with few, if any, offsetting benefits. We also provide early analysis of the new mortgage servicing rules enacted by the Consumer Financial Protection Bureau (CFPB) and find that these rules are contributing to even longer timelines, especially in nonjudicial states. While such changes are having some positive effects on mortgage servicing practices, we provide support for the growing body of evidence that longer timelines are constraining mortgage credit availability.
When Does Delinquency Result in Neglect? Mortgage Distress and Property Maintenance
Journal of Urban Economics, 2015, 90: 1-19.
Numerous studies have found that foreclosed properties sell at a discount and push down the sale prices of nearby properties, which may be partly driven by poorer maintenance of the foreclosed homes. However, direct evidence of foreclosure-related property neglect has been scarce. This paper uses data on constituent complaints and requests for public services made to the City of Boston to examine the incidence and timing of this type of foreclosure externality. Interior and exterior property conditions appear to suffer most while homes are bank owned, although complaints about reduced maintenance are also common earlier in the foreclosure process.
The Home Maintenance and Improvement Behaviors of Older Adults in Boston, with Jaclene Begley
Housing Policy Debate, 2015, 25 (4): 754-781.
Prior studies have found that older homeowners spend less money maintaining and improving their homes, which may reduce their quality of life and eventually pose larger, more costly housing problems. Delayed repairs and improvements may also have adverse spillover effects on neighborhoods. We explore the home maintenance expenditures, housing conditions, and credit access of older homeowners in Boston, where many aging adults have limited incomes and live in older structures, but also have substantial home equity that could be used as a financial resource. We find evidence that older homeowners spend less on home maintenance, and many live in low-income areas with high numbers of constituent complaints about housing conditions and less access to cheaper forms of credit. A particular policy intervention, the Boston Senior Home Repair Program, helps by providing home repair assistance to low- and moderate-income older homeowners.
Foreclosed Property Investors in a Strong Housing Market City: A Case Study of Boston, with Christopher Herbert, Irene Lew, and Rocio Sanchez-Moyano
Cityscape: A Journal of Policy Development and Research, 2015, 17(2): 239-268.
The housing bust brought a wave of foreclosures to low-income and minority communities where nonprime lending had been concentrated. With falling demand from owner-occupants, private investors emerged as significant buyers of foreclosed properties. Yet, there has been little systematic assessment about the scale of investor activity in these communities, who they are, or what they do with the properties they acquire. As part of a series of four case studies, this study examines the role of investors in acquiring foreclosed properties in Boston and nearby cities to shed light on how these activities are likely to impact these communities. Related paper: The Role of Investors in Acquiring Foreclosed Properties in Boston
Foreclosure Externalities in Homeowner Associations: Evidence from Condominiums in Boston, with Lynn M. Fisher and Paul S. Willen
American Economic Journal: Economic Policy, 2015, 7(1): 119-140.
We measure the effect of foreclosures on the sale prices of nearby properties using a dataset of condominiums in Boston. A foreclosure in the same association and at the same address depresses the sale price by 2.5 percent, but properties in the same association but located at a different address have an effect that is tightly estimated at zero. Since properties in the same association are close substitutes, we argue that the evidence points against the pecuniary externality of property coming on the market and toward a physical externality as the source of measured foreclosure externalities.
Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process, with Kristopher Gerardi and Paul Willen
Journal of Urban Economics, January 2013, 73: 1-17.
We evaluate the effects of laws designed to protect borrowers from foreclosure. We find that these laws delay but do not prevent foreclosures. We first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a build-up in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. We next analyze a “right-to-cure” law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, we compare Massachusetts with neighboring states that did not adopt similar laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers. Previous versions: Boston Fed Public Policy Discussion Paper, NBER Working Paper 17666
Are Investors the Bad Guys? Tenure and Neighborhood Stability in Chelsea, Massachusetts, with Lynn M. Fisher
Real Estate Economics, Summer 2012, 40(2): 351-386.
In this article, we examine the role of investors and occupant-owners in an urban context during the recent housing crisis. We focus on Chelsea, Massachusetts, because it is a dense city, dominated by multifamily housing structures with high rates of foreclosure for which we have particularly good data. We distinguish between occupant-owners and investors using local data, and we find that many investors are misclassified as occupant-owners in the Home Mortgage Disclosure Act data. Then, employing a competing risks framework to study ownerships during the period 1998 through mid-2010, we find that local investors, who tend to invest more in relation to purchase prices and sell more quickly, experienced approximately 1.8 times the mortgage foreclosure risk of occupant-owners, conditional on financing. Nonlocal investors have no statistically significant difference in foreclosure risk from occupant-owners. Nonetheless, those owners with subprime purchase mortgages (most of whom are occupant-owners) faced the highest foreclosure risk when house prices fell.
A Profile of the Mortgage Crisis in a Low-and-Moderate-Income Community with Lynn M. Fisher and Paul S. Willen
In The American Mortgage System: Crisis and Reform, editors Susan M. Wachter and Marvin M. Smith, 2011, University of Pennsylvania Press
Addressing the Prevalence of Real Estate Investments in the New Markets Tax Credit Program
Federal Reserve Bank of San Francisco, Community Development Investment Center, 2008, Working Paper 2008-04
Effects of Vacancy Decontrol on Berkeley Rental Housing
Berkeley Planning Journal, 2008, v. 21: 80-103.
Rising housing prices in California at the turn of the 21st century may be cause for a reevaluation of rent stabilization policies. Strong rent controls were dismantled in communities like Berkeley in the late 1990s, but little research has been conducted to measure the effects of the policy change on housing availability and rental prices.This paper investigates the impact of the current vacancy decontrol system on housing availability, adequacy, and affordability, while seeking to measure the lingering effects of the vacancy control system on the Berkeley rental housing market.