Regional Redistribution Through the U.S. Mortgage Market

69 Pages Posted: 28 Feb 2015 Last revised: 1 Mar 2016

See all articles by Erik Hurst

Erik Hurst

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department

Amit Seru

Stanford University

Joseph Vavra

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1, 2015

Abstract

Regional shocks are an important feature of the U.S. economy. Households' ability to self-insure against these shocks depends on how they affect local interest rates. In the U.S., most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSEs). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates which vary with local risk, and we postulate that the lack of regional variation in GSE mortgage rates is likely driven by political pressure. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions.

Keywords: Risk-sharing, GSEs, mortgages, redistribution, financial crisis, pricing

JEL Classification: G21, G28, E02

Suggested Citation

Hurst, Erik and Keys, Benjamin J. and Seru, Amit and Vavra, Joseph, Regional Redistribution Through the U.S. Mortgage Market (September 1, 2015). Kreisman Working Papers Series in Housing Law and Policy No. 25. Available at SSRN: https://ssrn.com/abstract=2570960 or http://dx.doi.org/10.2139/ssrn.2570960

Erik Hurst

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin J. Keys

The Wharton School - University of Pennsylvania, Real Estate Department ( email )

Philadelphia, PA 19104-6330
United States

Amit Seru (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Joseph Vavra

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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