Research & Publications

Research Papers

"Loan Origination and Defaults in the Mortgage Crisis: The Role of the Middle Class" with Manuel Adelino and Antoinette Schoar, 2016. Review of Financial Studies Accepted

This paper highlights the importance of middle-class and high-FICO borrowers for the mortgage crisis. Contrary to the popular view which focuses on subprime and poor borrowers, we show that mortgage originations increased for borrowers across all income levels and FICO scores. The relationship between mortgage- and income-growth at the individual level remained positive throughout the pre-2007 period. Finally, middle- and high-income borrowers, as well as prime borrowers, sharply increased their share of delinquencies in the crisis. These results are consistent with a demand-side view, where home buyers and lenders bought into increasing house values and borrowers defaulted after prices dropped.

"Loan Origination and Defaults in the Mortgage Crisis: Further Evidence" with Manuel Adelino and Antoinette Schoar, 2015.

This paper addresses two critiques by Mian and Sufi (2015a, 2015b) that were released in response to the results documented in Adelino, Schoar and Severino (2015). We confirm that none of the results in our previous paper are affected by the issues put forward in these critiques; in particular income overstatement does not drive any of our results. Our analysis shows that the origination of purchase mortgages increased across the whole income distribution during the 2002-2006 housing boom, and did not flow disproportionately to low-income borrowers. In addition, middle- and high-income, as well as middle- and high-credit-score borrowers (not the poor), represent a larger fraction of delinquencies in the crisis relative to earlier periods. The results are inconsistent with the idea that distortions in the origination of credit caused the housing boom and the crisis and are more consistent with an expectations-based view where both home buyers and lenders were buying into increasing housing values and defaulted once prices dropped.

"House Prices, Collateral and Self-Employment” with Manuel Adelino and Antoinette Schoar.  Journal of Financial Economics, Volume 117, Issue 2, Pages 288–306. NBER Working Paper 18868, 2014. NBER Digest.

This paper documents the role of the collateral lending channel to facilitate small business starts and self-employment in the period before the financial crisis of 2008. We document that between 2002 and 2007 areas with a bigger run up in house prices experienced a strong increase in employment in small businesses compared to employment in large firms in the same industries. This increase in small business employment was particularly pronounced in (1) industries that need little startup capital and can thus more easily be financed out of increases in housing as collateral; (2) manufacturing industries where goods are shipped over long distances, which rules out that local demand is driving the expansion. We show that this effect is separate from an aggregate demand channel that relies on home equity based borrowing leading to increased demand and employment creation.

“Personal Bankruptcy Protection and Household Debt with Meta Brown and Brandi Coates, 2015

Personal bankruptcy laws protect a fraction of an individual's assets from seizure by unsecured creditors in case of default. An increase in the level of bankruptcy protection diminishes the collateral value of assets, and can therefore reduce borrowers' access to credit. However, it might also increase the demand for credit especially from risk averse borrowers by improving risksharing. Using changes in the level of protection across US states and across time, we show that bankruptcy protection laws increase borrowers' holdings of unsecured credit, but leave secured debt -mortgage and auto loans- unchanged. At the same time we find an increase in the interest rate for unsecured credit, but not for other types of credit. The effect is predominantly driven by lowerincome areas and regions with higher home ownership concentration, for which an increase in the level of protection explains between 10% and 30% of the growth in their credit card debt. Using detailed individual data, we find no measurable increase in delinquency rates of households in the subsequent three years. These results suggest that changes in bankruptcy protections did not reduce the aggregate level of household debt but they might have affected the composition of borrowing.

"Credit Supply and House Prices: Evidence from Mortgage Market Segmentation with Manuel Adelino and Antoinette Schoar. NBER Working Paper 17832, 2014. CBS News

We show that easier access to credit significantly increases house prices by using exogenous changes in the conforming loan limit as an instrument for lower cost of financing. Houses that become eligible for financing with a conforming loan show an increase in house value of 1.16 dollars per square foot (for an average price per square foot of 220 dollars) and higher overall house prices controlling for a rich set of house characteristics. However, these estimated coefficients are consistent with a local elasticity of house prices to interest rates that is lower than some previous studies proposed (below 10). In addition, loan to value ratios around the conforming loan limit deviate significantly from the common 80 percent norm, which confirms that it is an important factor in the financing choices of home buyers. In line with our interpretation, the results are stronger in the first half of our sample (1998-2001) when the conforming loan limit was more important, given that other forms of financing were less common and substantially more expensive. Results are also stronger in zip codes where personal income growth is low or declining, and in regions with lower elasticity of housing supply.

Pre-PhD Research

"A Multicommodity Model of Futures Prices: Using Futures Prices of One Commodity to Estimate the Stochastic Process of Another" with Gonzalo Cortazar and Carlos Milla. Journal of Futures Markets, Vol. 28, No. 6, Jun 2008. KRX Best Paper Award. 4th Annual Conference of Asia Pacific Association of Derivatives (APAD)