Cross-Sectional Patterns of Mortgage Debt During the Housing Boom: Evidence and Implications

53 Pages Posted: 23 Nov 2016

See all articles by Christopher L. Foote

Christopher L. Foote

Federal Reserve Bank of Boston

Lara Loewenstein

Federal Reserve Bank of Cleveland

Paul Willen

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

Multiple version iconThere are 3 versions of this paper

Date Written: 2016-11-17

Abstract

The reallocation of mortgage debt to low-income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom. We show that such a reallocation never occurred, as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly. Moreover, because mortgage debt varies positively with income in the cross section, equal percentage increases in debt among high- and low-income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms. Previous research stressing the importance of low-income borrowing was based on the inflow of new mortgage originations alone, so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time. And while defaults on subprime mortgages played an important part in the financial crisis, the data show that subprime lending did not cause a reallocation of debt toward the poor. Rather, subprime lending prevented a reallocation of debt toward the wealthy.

JEL Classification: D12, D14, E03, G21, R21

Suggested Citation

Foote, Christopher L. and Loewenstein, Lara and Willen, Paul S., Cross-Sectional Patterns of Mortgage Debt During the Housing Boom: Evidence and Implications (2016-11-17). FRB of Boston Working Paper No. 16-12, Available at SSRN: https://ssrn.com/abstract=2874706

Christopher L. Foote (Contact Author)

Federal Reserve Bank of Boston ( email )

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Lara Loewenstein

Federal Reserve Bank of Cleveland ( email )

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Paul S. Willen

Federal Reserve Bank of Boston - Research Department ( email )

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National Bureau of Economic Research (NBER)

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