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Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market


Kristopher Gerardi


Federal Reserve Bank of Atlanta

Harvey S. Rosen


Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Paul Willen


Federal Reserve Bank of Boston - Research Department; National Bureau of Economic Research (NBER)

June 2006

Federal Reserve Bank of Boston Research Paper Series Public Policy Discussion Paper No. 06-6
Hudson Institute Research Paper No. 06-07

Abstract:     
The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in the development of a secondary market in mortgages. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households.

Our analysis is based on an implication of the permanent income hypothesis: that the higher a household's future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the imperfectness of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time.

We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. However, we find no evidence that the GSEs' activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers.

Number of Pages in PDF File: 59

JEL Classification: D14, G21, R21

working papers series


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Date posted: October 3, 2006 ; Last revised: August 6, 2008

Suggested Citation

Gerardi, Kristopher and Rosen, Harvey S. and Willen, Paul, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (June 2006). Federal Reserve Bank of Boston Research Paper Series Public Policy Discussion Paper No. 06-6; Hudson Institute Research Paper No. 06-07. Available at SSRN: http://ssrn.com/abstract=934422 or http://dx.doi.org/10.2139/ssrn.934422

Contact Information

Kristopher S. Gerardi (Contact Author)
Federal Reserve Bank of Atlanta ( email )
1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)
HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/
Harvey S. Rosen
Princeton University - Department of Economics ( email )
001 Fisher Hall
Princeton, NJ 08544
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Paul Willen
Federal Reserve Bank of Boston - Research Department ( email )
600 Atlantic Avenue
Boston, MA 02210
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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