Liquidity vs. Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession

Peter Ganong and Pascal Noel

No 24964, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We use variation in mortgage modifications to disentangle the impact of reducing long-term obligations with no change in short-term payments (“wealth”), and reducing short-term payments with approximately no change in long-term obligations (“liquidity”). Using regression discontinuity and difference-in-differences research designs with administrative data measuring default and consumption, we find that principal reductions that increase housing wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. Our results suggest that liquidity drives borrower default and consumption decisions, and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers.

JEL-codes: D14 G21 R28 (search for similar items in EconPapers)
Date: 2018-08
New Economics Papers: this item is included in nep-ure
Note: CF PE
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