Distributional Implications of Government Guarantees in Mortgage Markets
The Review of Financial Studies, Volume 31, Issue 3, March 2018, Pages 1064–1097, DOI: 10.1093/rfs/hhx083
68 Pages Posted: 21 Mar 2016 Last revised: 26 Nov 2019
Date Written: March 2018
We analyze the removal of the credit-risk guarantees provided by the government-sponsored enterprises (GSEs) in a model with agents heterogeneous in income and house price risk. We find that wealth inequality increases, driven by higher mortgage spreads and housing rents. Housing holdings become more concentrated. Foreclosures fall. The removal benefits high-income households, while hurting low- and mid-income households (renters and highly leveraged mortgagors with conforming loans). GSE reform requires compensating transfers, sufficiently high elasticity of rental supply, or linking GSE reform with the elimination of the mortgage interest deduction.
Keywords: Default, Loan Guarantees, Housing, Inequality, Mortgages, Rents
JEL Classification: E51, H81, G21, R2
Suggested Citation: Suggested Citation