Macroeconomic Effects of Household Leverage Regulations after the Crisis
62 Pages Posted: 27 Jan 2020
Date Written: June 11, 2019
This paper assesses the aggregate and distributional effects of policies that seek to reduce mortgage default by limiting a borrower's debt payment-to-income ratio. I document empirically that highly creditworthy borrowers appear constrained by a current institutional debt payment-to-income limit. I propose a heterogeneous-agent life-cycle model with a competitive mortgage market, endogenous default, and mortgage contract choice consistent with the empirical findings. In the calibrated model, I show that, relative to the current uniformly applied debt payment-to-income cap, a policy that combines a more strict debt payment-to-income limit with a costly option to relax the limit lowers default and improves aggregate welfare, particularly for households in the middle of the wealth distribution who have low incomes.
Keywords: macroeconomics, mortgages, housing, default, foreclosure, debt payment-to-income ratio
JEL Classification: E2, G21
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