EconPapers    
Economics at your fingertips  
 

Got Hurt for What You Paid? Revisiting Government Subsidy in the U.S. Mortgage Market

Yunhui Zhao

MPRA Paper from University Library of Munich, Germany

Abstract: I evaluate the subsidized default insurance policy (implemented through the guarantee for Government-Sponsored Enterprises, GSEs) in the U.S. mortgage market both empirically and theoretically. Empirically, I find that the subsidy has raised mortgage interest rates for all loans strictly eligible for the subsidy (conforming loans), which is contrary to conventional wisdom. I do so by applying regression discontinuity designs and using the exogenous variation in mortgage rates generated by a mandate of U.S. Congress. My empirical strategy circumvents the endogeneity problem in conventional studies. Then I set up a screening model with asymmetric information, which explains my empirical results. Moreover, the model implies that the subsidy has hurt borrowers it was intended to help, even without considering the higher tax burden imposed on borrowers to finance the subsidy. The observed positive jumbo-conforming spread can also be explained by the model through incentive compatibility constraints associated with asymmetric information. My paper cautions regulators against interpreting the observed jumbo-conforming spread as an indication that the subsidy necessarily decreases mortgage rates and benefits conforming borrowers. Moreover, the paper shows that the subsidy raises household leverage, increases mortgage default rate, and ultimately undermines financial stability, calling for deeper housing finance reforms in the U.S. beyond the Dodd-Frank Act.

Keywords: U.S. Mortgage; Government-Sponsored Enterprises; Default; Regression Discontinuity Designs; Moral Hazard (search for similar items in EconPapers)
JEL-codes: C54 G18 G21 R3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ure
Date: 2016-12-22, Revised 2017-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/81083/1/MPRA_paper_81083.pdf original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:81083

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Series data maintained by Joachim Winter ().

 
Page updated 2017-09-29
Handle: RePEc:pra:mprapa:81083