Ronel Elul

Collateral, Credit-History and the Financial Decelerator

The author develops a simple model in which financial imperfections can serve to stabilize aggregate fluctuations and not merely aggravate them as in much of the previous literature; the author terms this a financial decelerator. In the model agents borrow to purchase housing and secure their loans with this long-lived asset. There are two financial imperfections in this model. First, agents are unable to commit to repay their loans ? that is, they can strategically default. This limits the amount that lenders are willing to offer. In addition, however, lenders are also imperfectly informed as to a borrower?s propensity to default; that is, there is adverse selection. The latter imperfection implies that default may actually occur in equilibrium, unlike in much of the previous literature. For relatively high house prices the commitment problem ensures that the equilibrium is typically characterized by a standard financial accelerator; that is, the borrowing constraints which prevent default become tighter as falling prices reduce the wealth with which agents can collateralize future loans, thereby exacerbating aggregate fluctuations. However, Elul shows that when prices are very low, agents will default, which serves as a stabilizing force; he terms this a financial decelerator. ; Also issued as Payment Cards Center Discussion Paper No. 05-14

Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages

Refinancing a first mortgage puts legal principles in conflict when other, junior, liens also exist. On one hand, the principle that seniority follows time priority leaves the new refinancing mortgage junior to mortgages that were junior to the original, refinanced first mortgage. On the other hand, the principle of equitable subrogation gives the refinancing mortgage the seniority of the claim it paid down. States resolve this tension differently, thus differentiating how much a second mortgage impedes refinancing of the first. We exploit this cross-state variation to identify the impact on mortgage refinancing and find that refinancing is significantly more likely in the states following the principle of equitable subrogation when the homeowner also has a second mortgage.

Understanding House Price Index Revisions

Residential house price indexes (HPI) are used for a large variety of macroeconomic and microeconomic research and policy purposes, as well as for automated valuation models. As is well known, these indexes are subject to substantial revisions in the months following the initial release, both because transaction data can be slow to come in, and as a consequence of the repeat sales methodology, which interpolates the effect of sales over the entire period since the house last changed hands. We study the properties of the revisions to the CoreLogic House Price Index. This index is used both by researchers and in the Financial Accounts of the United States to compute the value of residential real estate. We show that the magnitude of revisions to this index can be significant: At the national level, the ratio of standard deviation of monthly revisions to the growth rate of the index, relative to the standard deviation of the growth rate in the index, is 29%, which is comparable to the relative ratio for other macroeconomic series. The revisions are also economically significant and impact measures used by policymakers: Revisions over the first 12 releases of the index reduce estimates of the fraction of borrowers nationwide with negative equity by 4.3%, corresponding to 423,000 households. Lastly, we find that revisions are ex-ante predictable: Both past revisions and past house price appreciation are negatively correlated with future revisions.