Regulating Household Leverage
John Mondragon and
Additional contact information
Stephanie Johnson: Northwestern University
John Mondragon: Northwestern University
Anthony DeFusco: Northwestern University
No 327, 2017 Meeting Papers from Society for Economic Dynamics
Despite the growing interest in policies that seek to constrain household leverage, there is only limited empirical evidence on how such policies affect the markets they intend to regulate. In this paper, we estimate how a central U.S. policy intended to reduce household leverage in the mortgage market—the Ability-to-Repay/Qualiﬁed Mortgage rule—affects the price, quantity, and anticipated performance of credit. Using a difference-in-differences strategy that exploits a policy-induced discontinuity in the legal liability associated with originating certain high-leverage mortgages, we estimate that the Ability-to-Repay/Qualiﬁed Mortgage rule led lenders to charge an additional 10-15 basis points per year to originate such loans. For the average affected borrower in our sample, this premium works out to roughly $1,700– 2,600 in additional interest over the typical life of a loan, or as much as $13,000–20,000 if held to maturity. By measuring the amount of bunching and missing mass near the discontinuity separating high- and low-leverage loans, we also estimate that the policy eliminated 2 percent of the affected segment of the market completely and led to a reduction in leverage for another 2.7 percent of loans. These estimates imply that when current exemptions expire and the policy is extended to the entire mortgage market, it will reduce the total volume of purchase mortgage originations by roughly $12 billion per year. Our estimates also suggest that these restrictions on leverage would have only modestly reduced the aggregate default rate during the housing crisis.
New Economics Papers: this item is included in nep-ban and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:red:sed017:327
Access Statistics for this paper
More papers in 2017 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Series data maintained by Christian Zimmermann ().