Research

Working Papers:

“Mortgage Choice and the Credit Guarantee” (Job Market Paper). Find it here.

I analyze the general equilibrium effects of government-sponsored enterprises' credit guarantees for fixed-rate mortgages. I develop a macroeconomic model where borrowers choose between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs) provided by a constrained financial intermediary. Relative to FRMs, ARMs typically have lower required payments during recessions generating lower and less cyclical default rates. Since the intermediary prices the exposure to credit risk, borrowers choose 60% of ARMs in an economy without credit guarantees. This outcome aligns with some European economies where ARMs are prevalent, and intermediaries maintain unhedged balance sheets against credit risk. With existing guarantees, the intermediary does not bear FRMs credit risk, resulting in a high insensitivity of the FRM rate to borrower’s leverage. As observed in the US, this leads to a 70% FRM share. Compared to the economy without guarantees, mortgage default rates are higher, while intermediary equity, borrower consumption and house price volatility increase. The difference in the general equilibrium impact of guarantees crucially relies on my model's novel feature of endogenizing the mortgage choice.

“Printing Away the Mortgages: Fiscal Inflation and the Post-Covid Housing Boom”, with Tim Landvoigt and William Diamond. Find it here.

We theoretically and quantitatively analyze the impact of fiscal and monetary stimulus during and after the 2020 Covid recession on output, inflation, and house prices. Our theoretical analysis clarifies that fiscal stimulus increases consumption demand in a recession by providing liquidity, by redistributing from savers to borrowers, and by lowering the return on saving if it causes future inflation. Future inflation only occurs if taxes after the recession do not increase to pay for the stimulus. In our quantitative analysis, we study a temporary shift to passive monetary policy with low responsiveness to inflation. Fiscally-driven inflation enabled by this passive monetary policy reduces the real value of both mortgages and government debt, so it increases the spending capacity and housing demand of credit-constrained homeowners. Together with transfer payments and large fiscal deficits during the Covid recession, this policy greatly reduces the recession’s severity and causes high house prices and inflation similar to the data.

“Restricted Mortgage Offering in the Great Recession”, with Dick Oosthuizen. Find it here.

The literature has studied the ex-ante consequences of introducing teaser-rate mortgages (TRMs) on the housing and mortgage markets. We study how the ex-post restricted access to TRMs during the Great Recession amplified the housing bust. TRMs start with a low initial rate, with the expectation of a rate hike in the future. Empirically, we show that lower-income and younger households chose TRMs during the housing boom. At the onset of the crisis, the government-sponsored enterprises tightened restrictions on their purchases of TRMs, which induced intermediaries to increase their lending standards. To evaluate the impact of eliminating TRMs during the crisis, we use a dynamic general equilibrium housing model with long-term mortgages and a contract choice between fixed-rate mortgages (FRMs) and TRMs. The restricted contract choice amplifies the house price drop by 1 percentage point. Without the availability of TRMs, low-income and younger households are excluded from the mortgage market, leading to a decrease in housing demand that triggers a downward spiral effect on house prices. Without the restricted supply, the share of TRMs would nearly have doubled during the crisis.

Work in Progress:

“Flippers and the Business Cycle”, with Agustín Díaz Casanueva and Sean McCrary