Neil Bhutta

The Depth of Negative Equity and Mortgage Default Decisions

A central question in the literature on mortgage default is at what point underwater homeowners walk away from their homes even if they can afford to pay. We study borrowers from Arizona, California, Florida, and Nevada who purchased homes in 2006 using non-prime mortgages with 100 percent financing. Almost 80 percent of these borrowers default by the end of the observation period in September 2009. After distinguishing between defaults induced by job losses and other income shocks from those induced purely by negative equity, we find that the median borrower does not strategically default until equity falls to -62 percent of their home’s value. This result suggests that borrowers face high default and transaction costs. Our estimates show that about 80 percent of defaults in our sample are the result of income shocks combined with negative equity. However, when equity falls below -50 percent, half of the defaults are driven purely by negative equity. Therefore, our findings lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest.

Interest Rates and Equity Extraction During the Housing Boom

Credit record panel data from 1999-2010 indicates that the likelihood of home equity extraction (borrowing, on average, about

Payday Loan Choices and Consequences

40,000 against ones home) peaked in 2003 when mortgage rates reached historic lows. We estimate a 27 percent rise in extraction in response to a 100 basis point rate decline, and that house price growth amplifies this relationship. Differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions. Finally, equity extractions are associated with higher default risk, consistent with the use of borrowed funds for consumption or illiquid investment.

The Community Reinvestment Act and Mortgage Lending to Lower Income Borrowers and Neighborhoods

High‐cost consumer credit has proliferated in the past two decades, raising regulatory scrutiny. We match administrative data from a payday lender with nationally representative credit bureau files to examine the choices of payday loan applicants and assess whether payday loans help or harm borrowers. We find consumers apply for payday loans when they have limited access to mainstream credit. In addition, the weakness of payday applicants’ credit histories is severe and longstanding. Based on regression discontinuity estimates, we show that the effects of payday borrowing on credit scores and other measures of financial well‐being are close to zero. We test the robustness of these null effects to many factors, including features of the local market structure.

Consumer Borrowing after Payday Loan Bans

This paper evaluates the Community Reinvestment Act (CRA), a law mandating that banks help meet the credit needs of lower income households and neighborhoods. To measure the effect of the law on lending to targeted groups since 1994, I take advantage of discontinuous targeting rules and abrupt changes in target status. On average, the CRA appears to have had little impact on mortgage lending, even during the mid-2000s, when lending to lower income areas nevertheless soared. I do find a significant effect during the late 1990s and early 2000s in large metropolitan areas, when and where the CRA may have been most binding. I use this episode to test the effect of the CRA on overall mortgage availability—that is, lending by both regulated and unregulated institutions. The results are consistent with the notion that government intervention in credit markets may be justified on the grounds that information externalities exist and can depress credit supply.

Consumer Ruthlessness and Mortgage Default During the 2007 to 2009 Housing Bust

High-interest payday loans have proliferated in recent years; so too have efforts to regulate them. Yet how borrowers respond to such regulations remains largely unknown. Drawing on both administrative and survey data, we exploit variation in payday-lending laws to study the effect of payday loan restrictions on consumer borrowing. We find that although such policies are effective at reducing payday lending, consumers respond by shifting to other forms of high-interest credit (for example, pawnshop loans) rather than traditional credit instruments (for example, credit cards). Such shifting is present, but less pronounced, for the lowest-income payday loan users. Our results suggest that policies that target payday lending in isolation may be ineffective at reducing consumers’ reliance on high-interest credit.

Credit Availability and the Decline in Mortgage Lending to Minorities after the Housing Boom

From 2007 to 2009 house prices in the U.S. plunged and mortgage defaults surged. Media anecdotes portray strategic default behavior as widespread, but survey evidence indicates that Americans by and large view strategic default unfavorably. We examine data on actual mortgage default decisions during the recent housing downturn to estimate how far underwater one must fall before deciding to strategically default. We combine monthly ZIP code house price indices with loan-level data tracking the monthly performance of over 130,000 nonprime home purchase loans originated in 2006. We estimate that the median borrower in our sample does not walk away until housing equity drops to -67 percent. Moral aversion to default may be an important factor explaining this result since the borrowers in our sample arguably face low default costs along other dimensions. Finding evidence of high moral aversion to default is important as it implies that the moral hazard cost of the default option as a form of social insurance will be low.

Changing FHA Mortgage Insurance Premiums and the Effects on Lending

This note sheds light on the factors contributing to the disproportionate decline in lending to minorities since 2006.

Effects of the Ability to Repay and Qualified Mortgage Rules on the Mortgage Market

This note explores the effect of changes in Federal Housing Administration (FHA) mortgage insurance premiums (MIP) on mortgage borrowing activity. Reacting to changing conditions in the mortgage market as well as the state of its own balance sheet, the FHA has adjusted its pricing rules a number of times in the wake of the financial crisis.

The Effect of Interest Rates on Home Buying: Evidence from a Discontinuity in Mortgage Insurance Premiums

In this note, we use recently released loan level data collected under the Home Mortgage Disclosure Act (HMDA) to examine how the new ability-to-repay (ATR) rules may have affected mortgage lending activity in 2014.