Distributional Implications of Government Guarantees in Mortgage Markets

Gete, Pedro; Zecchetto, Franco

doi:10.2139/ssrn.2751726

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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

See all articles by Pedro Gete

Franco Zecchetto

Instituto Tecnológico Autónomo de México (ITAM) - Department of Business Administration

Date Written: March 2018

Abstract

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

Gete, Pedro and Zecchetto, Franco, Distributional Implications of Government Guarantees in Mortgage Markets (March 2018). The Review of Financial Studies, Volume 31, Issue 3, March 2018, Pages 1064–1097, DOI: 10.1093/rfs/hhx083, Available at SSRN: https://ssrn.com/abstract=2751726 or http://dx.doi.org/10.2139/ssrn.2751726