Essays on Mortgages and Government Debt

Abstract

This dissertation focuses on mortgages and government debt. The first chapter explores the microelasticity of mortgage demand to interest rates. Using a novel regression discontinuity approach and using novel administrative data alongside individual loan- and credit- level data, I find a large intensive and extensive margin response. A 25 basis point decrease in mortgage rates for high-FICO individuals is associated with a 50% increase in the likelihood of a potential borrower to demand a loan and an increase in loan size of approximately $15k, or approximately 10% of the average origination volume. I also document that for both the intensive and extensive margin, borrowers with high FICOs tend to be more sensitive to interest rate changes, elasticities are relatively constant over time, and the marginal responsiveness to interest rates is decreasing. The second chapter, joint with Paul Willen and Andreas Fuster, studies the time-varying price of financial intermediation in the mortgage market. We find that the price of intermediation, measured as a fraction of the loan amount at origination, is large – 142 basis points on average over the period 2008-2014. At daily frequencies, intermediaries pass on price changes in the secondary market to borrowers in the primary market almost completely. At lower frequencies, the price of intermediation fluctuates significantly. It is highly sensitive to application volume. Over 2008-2014, the price of intermediation increased about 30 basis points per year, potentially reflecting increased mortgage servicing costs and increased legal and regulatory burdens. Finally, increases in volume associated with “quantitative easing” (QE) led to substantial increases in the price of intermediation, which attenuated the benefits of QE to borrowers. The third chapter studies how the U.S. government primary surplus (separating out expenditures and revenues) has responded to debt historically. I focus on three main themes. First, I find that recent government policy (1950-2012) has been less responsive to debt than the historical period (1792-1950). Second, I provide evidence of non-linearity in the debt function, with governments responding more strongly to higher levels of debt. Finally, I explore the reaction of the U.S. government not only to its own debt, but also to U.S. sector-level debt.