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We study the joint evolution of prices and rents of residential property. We construct indices for both rents and prices of renter-occupied properties and for prices of owner-occupied properties. We then decompose the change in the price of occupant-owned property into three components: (1) changes in rent, (2) changes in the relative prices of investor- and occupant-owned properties, and (3) changes in the price-rent ratio. We use a simple model to link our decomposition to different sources of variation in house prices. We argue that while the 2000s boom was plausibly driven by exuberant expectations, the boom of the 2020s more likely resulted from a preference shock.

The COVID-19 pandemic exacerbated racial disparities in U.S. mortgage markets. Black, Hispanic, and Asian borrowers were significantly more likely than white borrowers to miss payments due to financial distress, and significantly less likely to refinance to take advantage of the large decline in interest rates spurred by the Federal Reserve’s large-scale mortgage-backed security (MBS) purchase program. The wide-scale forbearance program, introduced by the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act, provided approximately equal payment relief to all distressed borrowers, as forbearance rates conditional on nonpayment status were roughly equal across racial/ethnic groups. However, Black and Hispanic borrowers were significantly less likely to exit forbearance and resume making payments relative to their Asian and white counterparts. Persistent differences in the ability to catch up on missed payments could worsen the already large disparity in home ownership rates across racial and ethnic groups. While the pandemic caused widespread distress in mortgage markets, strong house price appreciation in recent years, particularly in 2020, means that foreclosure risk is lower for past-due borrowers now as compared with the aftermath of the Global Financial Crisis and Great Recession. Furthermore, borrowers who have missed payments have significantly higher credit scores now than those who were distressed in the 2007–2010 period, largely due to the widespread availability of forbearance for federally backed mortgages.

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on "plain-vanilla" conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

We study the evolution of US mortgage credit supply during the COVID-19 pandemic. Although the mortgage market experienced a historic boom in 2020, we show there was also a large and sustained increase in intermediation markups that limited the pass-through of low rates to borrowers. Markups typically rise during periods of peak demand, but this historical relationship explains only part of the large increase during the pandemic. We present evidence that pandemic-related labor market frictions and operational bottlenecks contributed to unusually inelastic credit supply, and that technology-based lenders, likely less constrained by these frictions, gained market share. Rising forbearance and default risk did not significantly affect rates on “plain-vanilla” conforming mortgages, but it did lead to higher spreads on mortgages without government guarantees and loans to the riskiest borrowers. Mortgage-backed securities purchases by the Federal Reserve also supported the flow of credit in the conforming segment.

We use a new methodology to assess mortgage pricing discrimination faced by minority borrowers. We identify a “menu problem” that comes from the multidimensional nature of mortgage pricing: When getting a mortgage, borrowers can choose to avoid closing costs and pay a high interest rate or contribute to closing costs to get a lower rate. While data on both dimensions of mortgage pricing are by now often available, intuitively attractive metrics of lender pricing discrimination used in the literature can lead to both false and contradictory results. For example, it is sometimes observed that conditional on rate, minority borrowers pay the same closing costs as white borrowers, but conditional on closing costs, minority borrowers pay a higher rate. Though generally underappreciated, the menu problem is broadly relevant in economic assessments of differences in opportunity given data on outcomes. We develop a solution to the menu problem by defining (1) a test statistic for equality in menus and (2) a difference in menus (DIM) metric for assessing whether one group of borrowers would prefer to switch to another group’s menus, both based on pairwise dominance relationships in the data. Our proposed solution is robust to arbitrary heterogeneity in borrower preferences across racial groups. We show how our metrics can be computed using methods from optimal transport and also devise a new procedure for hypothesis testing in this class of problems based on directional differentiation. Finally, we implement our methodology on a data set linking 2018–2019 Home Mortgage Disclosure Act (HMDA) data to Optimal Blue rate locks, and present novel results on mortgage pricing discrimination.

During the period 2005 to 2020, Black borrowers with mortgages insured by Fannie Mae or Freddie Mac paid interest rates that were almost 50 basis points higher than those paid by non-Hispanic white borrowers. We show that the main reason is that non-Hispanic white borrowers are much more likely to exploit periods of falling interest rates by refinancing their mortgages or moving. Black and Hispanic white borrowers face challenges refinancing because, on average, they have lower credit scores, equity, and income. But even holding those factors constant, Black and Hispanic white borrowers refinance less, suggesting that other social factors are at play. Because they are more likely to exploit lower interest rates, white borrowers benefit more from monetary expansions. Policies that reduce barriers to refinancing for minority borrowers and alternative mortgage contract designs that more directly pass through interest rate declines to borrowers can reduce racial mortgage pricing inequality.

Mortgage borrowers who have experienced employment disruptions as a result of the COVID-19 pandemic are unable to refinance their loans to take advantage of historically low market rates. In this article, we analyze the effects of a streamlined refinance (“refi”) program for government-insured loans that would allow borrowers to refinance without needing to document employment or income. In addition, we consider a cash-out component that would allow borrowers to extract some of the substantial housing equity that many have accumulated in recent years.

This article reviews the surge in research on mortgage default inspired by the recent foreclosure crisis. Economists already understood a great deal about default, both theoretically and empirically, when the crisis began, but new research has moved the frontier further by improving data sources, building dynamic optimizing models of default, and explicitly addressing reverse causality between rising foreclosures and falling house prices. Mortgage defaults also featured prominently in early papers that pointed to subprime and other privately securitized mortgages as fundamental drivers of the housing boom, although this research has been criticized recently. Going forward, improvements to data and models will allow researchers to make progress on the two central questions in this literature. First, what are the relative contributions of adverse life events and negative equity to mortgage default? Second, why is default so rare, even among people with deep negative equity or acute financial distress?

Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate reductions dramatically affect repayment behavior, even for borrowers who are significantly underwater on their mortgages. Our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about 55 percent, an effect approximately equivalent to lowering the borrower's combined loan-to-value ratio from 145 to 95 (holding the payment fixed). These findings shed light on the driving forces behind default behavior and have important implications for public policy.

This paper uses new data from the PSID to quantify the relative importance of negative equity versus ability to pay, in driving mortgage defaults between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. Changes in ability to pay have large estimated effects. Job loss has an equivalent effect on the propensity to default as a 35% decline in equity. Strategic motives are also found to be quantitatively important, as we estimate more than 38% of households in default could make their mortgage payments without reducing consumption. Received September 29, 2015; editorial decision June 2, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University PressWeb site next to the link to the final published paper online.

We use a new methodology to assess mortgage pricing discrimination by race. We make four main contributions. First, we show that existing estimates of mortgage pricing differences by race can be confounded by a "menu problem," which is the problem associated with evaluating equality in opportunity under multi-dimensional pricing. Though under-appreciated, the menu problem is broadly relevant in economic assessments of differences in opportunity given data on outcomes. Second, we provide a general methodology for resolving this menu problem based on relatively weak economic assumptions. More specifically, we use pairwise dominance relationships in mortgage pricing supplemented by restrictions on the range of plausible menus to define (1) a test statistic for equality in menus and (2) a difference in menus (DIM) metric for assessing whether one group of borrowers would prefer to switch to another group's menus. Our metrics are robust to arbitrary heterogeneity in borrower preferences across racial groups over the menu items, are sharp in terms of identification, and can be efficiently computed using methods from Optimal Transport. Third, to conduct statistical inference we devise a new procedure for hypothesis testing in the value of Optimal Transport problems based on directional differentiation. Fourth, we use our methodology to estimate mortgage pricing differentials by race on a new data set linking 2018--2019 Home Mortgage Disclosure Act (HMDA) data to Optimal Blue rate locks. We find robust evidence for mortgage pricing differentials by race, particularly among Conforming mortgage borrowers who are relatively creditworthy.

In this paper, we use two comprehensive micro-data sets to study how the distribution of mortgage debt evolved during the 2000s housing boom. We show that the allocation of mortgage debt across the income distribution remained stable, as did the allocation of real estate assets. Any theory of the boom must replicate these facts, and a general equilibrium model shows that doing so requires two elements: (1) an exogenous shock that increases expected house price growth or, alternatively, reduces interest rates and (2) financial markets that endogenously relax borrowing constraints in response to the shock. Empirically, the endogenous relaxation of constraints was largely accomplished with subprime lending, which allowed the mortgage debt of low-income households to increase at the same rate as that of high-income households.

The application of information technology to finance, or “fintech,” is expected to revolutionize many aspects of borrowing and lending in the future, but technology has been reshaping consumer and mortgage lending for many years. During the 1990s computerization allowed mortgage lenders to reduce loan-processing times and largely replace human-based assessment of credit risk with default predictions generated by sophisticated empirical models. Debt-to-income ratios at origination add little to the predictive power of these models, so the new automated underwriting systems allowed higher debt-to-income ratios than previous underwriting guidelines would have typically accepted. In this way, technology brought about an exogenous change in lending standards, which helped raise the homeownership rate and encourage the conversion of rental properties to owner-occupied ones, but did not have large effects on housing prices. Technological innovation in mortgage underwriting may have allowed the 2000s housing boom to grow, however, because it enhanced the ability of both borrowers and lenders to act on optimistic beliefs about future house-price growth.

Policy makers have used externalities to justify government intervention in the foreclosure process. Using a new dataset that covers 15 of the largest metropolitan statistical areas in the U.S. and a novel identification strategy, this paper provides new evidence on the size and source of these externalities. Our results show that a property in distress affects the value of neighboring properties from the time when the borrower becomes seriously delinquent on the mortgage until well after the bank sells the property to a new owner. Properties with seriously delinquent loans within 0.1 miles are found to decrease transaction prices of non-distressed properties by approximately one percent on average. The spillovers are found to dissipate rapidly with distance and completely disappear one year after the bank sells the property to a new homeowner. Importantly, we find that the size of the externality is sensitive to the condition of foreclosed properties, as bank-owned properties in poor condition lower nearby transaction prices by 2.6% on average while those in good condition marginally raise prices. We argue that the measured price spillovers are physical externalities caused by a lack of property maintenance and not pecuniary externalities that reflect local supply or demand shocks.

The U.S. mortgage market links homeowners with savers all over the world. In this paper, we ask how much of the flow of money from savers to borrowers goes to the intermediaries that facilitate these transactions. Based on a new methodology and a new administrative data set, 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 2008-14 period. At daily frequencies, intermediaries pass on price changes in the secondary market to borrowers in the primary market almost completely. At monthly frequencies, the price of intermediation fluctuates significantly and is highly sensitive to volume, likely reflecting capacity constraints: a one standard deviation increase in applications for new mortgages leads to a 30-35 basis point increase in the price of intermediation. Additionally, over 2008-14, the price of intermediation increased about 30 basis points per year, potentially reflecting higher mortgage servicing costs and an increased legal and regulatory burden. Taken together, the sensitivity to volume and the positive trend led to an implicit total cost to borrowers of about $140 billion over this period. Finally, increases in application volume associated with “quantitative easing” (QE) led to substantial increases in the price of intermediation, which attenuated the benefits of QE to borrowers.

I evaluate the empirical premise and the economic logic of the Dodd-Frank Act's requirement that issuers of asset-backed securities retain credit risk.

This paper develops and estimates an instrumental variables strategy for identifying the causal effect of securitization on the incidence of mortgage modification and foreclosure based on the early payment default analysis performed by Piskorsi et al. (J Financ Econ 97:360–397, 2010). Estimation results show that securitized mortgages are more likely to be modified and less likely to be foreclosed on by servicers. These results are consistent with the interpretation in Adelino et al. (2009) that low modification rates are not the result of contract frictions inherent in the mortgage securitization process.

We develop a technique to assess the impact of changes in mortgage markets on house holds, exploiting an implication of the permanent income hypothesis: The higher a household's expected future income, the higher its desired consumption, ceteris paribus. With perfect credit markets, desired consumption matches actual consump tion and current spending forecasts future income. Because credit market imperfec tions mute this effect, the extent to which house spending predicts future income measures the "imperfectness" of mortgage markets. Using micro-data, we find that since the early 1980s, mortgage markets have become less imperfect in this sense, and securitization has played an important role. The U.S. mortgage market has experienced phenomenal change over the last 35 years. Gone are the days when most households get a cookie-cutter, 30-year, fixed-rate, level-payment mortgage from a savings and loan that takes deposits at 3% and lends at 6%. Also gone are the days when the typical lender holds that mortgage on its books until the maturity of the loan. Today, consumers choose from an extensive menu of mortgages offering flexibility along almost every dimension. Furthermore, most lenders hold the mortgage for only a short time; typically, they sell the mortgage on the secondary market. Many researchers have argued that this transformation has enhanced effi ciency by integrating the mortgage market with the broader financial markets. However, there has been comparatively little research investigating how or even whether the transformation of mortgage markets has directly affected

This paper takes a skeptical look at a leading argument about what is causing the foreclosure crisis and what should be done to stop it. We use an economic model to focus on two key decisions: the borrower's choice to default on a mortgage and the lender's subsequent choice whether to renegotiate or modify the loan. The theoretical model and econometric analysis illustrate that unaffordable loans, defined as those with high mortgage payments relative to income at origination, are unlikely to be the main reason that borrowers decide to default. In addition, this paper provides theoretical results and empirical evidence supporting the hypothesis that the efficiency of foreclosure for investors is a more plausible explanation for the low number of modifications to date than contract frictions related to securitization agreements between servicers and investors. While investors might be foreclosing when it would be socially efficient to modify, there is little evidence to suggest they are acting against their own interests when they do so. An important implication of our analysis is that policies designed to reduce foreclosures should focus on ameliorating the immediate effects of job loss and other adverse life events rather than modifying loans to make them more affordable on a long-term basis.

Using two large proprietary datasets from New England, this paper establishes some basic facts about the subprime crisis. First, while unaffordable interest-rate resets are often blamed for setting off this crisis, most subprime borrowers who defaulted did so well in advance of their reset dates. Defaults on subprime adjustable-rate mortgages are more sensitive to declining housing prices than are defaults on fixed-rate loans, however, and the data support a number of alternative explanations for this finding. Second, many borrowers with good credit scores took out subprime loans as the housing boom gathered steam. It is hard to construct a prima facie case that these borrowers were inappropriately steered into the subprime market, however, because the loans that these borrowers took out were too risky for prime treatment. Finally, 70% of Massachusetts homes recently lost to foreclosure were originally purchased with prime mortgages. But subprime refinancing is especially prevalent among owners who were likely to have extracted substantial amounts of equity before they defaulted.

Recent declines in housing prices have focused attention on the relationship between negative housing equity and mortgage default. Theory implies that negative equity is a necessary condition for default, but not a sufficient one. This often-misunderstood result is clearly illustrated in a dataset of Massachusetts homeowners during the early 1990s; fewer than 10 percent of borrowers likely to have had negative equity at the end of 1991 experienced a foreclosure during the following three years. An econometric model of default estimated on two decades of Massachusetts housing data also predicts low default rates for current negative-equity borrowers. We develop a simple theoretical model to interpret these empirical findings and to assess potential foreclosure-reduction policies. Our results imply that lenders and policymakers face an information problem in trying to help borrowers with negative equity, because it is hard to determine which owners really need help in order to stay in their homes.

A subprime mortgage loan is a residential mortgage loan that is particularly risky for some reason. The elevated risk may stem from the credit history of the borrower, the lack of a large down payment, or a monthly payment that is large relative to the borrower’s income (see Chapter 2 of Muolo and Padilla (2010) for a history of subprime residential lending). Subprime loans were unlikely to meet the credit-quality standards of the two government-sponsored entities (GSEs), Fannie Mae and Freddie Mac, which package so-called prime mortgage loans into mortgage-backed securities for sale to outside investors, and which eliminate credit risk by guaranteeing principal and interest payments to investors if the borrower defaults. While the GSEs did not have hard-and-fast cutoffs regarding borrower credit quality, they were historically less likely to securi-tize loans made to borrowers with poor credit histories.

We evaluate the effects of new financial markets in a two-period incomplete markets model with heterogenous agents. For analytical tractability, we focus on the special case where utility is exponential and risks are normally distributed. We provide a complete characterization of life-cycle consumption and portfolio choice. The effect of new financial markets on individual welfare equals the sum of what we call the portfolio effect and the price effect. The portfolio effect is proportional to the square of the difference between the average exposure to the new asset in the economy and an individual investor’s exposure adjusted for risk aversion. The portfolio effect is always positive and measures the improved ability of investors to transfer consumption across states. The price effect captures the effect on individual welfare of changes in asset prices. We show that new financial markets drive down the prices of all assets which raises the interest rate and thus affects the ability of investors to transfer consumption across time. The price effect is positive for net savers but can be negative for net borrowers. For net borrower households, the price effect can wipe out the portfolio effect and lead to welfare reductions.

Stress testing has recently become a critical risk management and capital planning tool for large financial institutions and their supervisors around the world. However, the one prior U.S. experience tying stress test results to capital requirements was a spectacular failure: The office of Federal Housing Enterprise Oversight’s (OFHEO’s) risk-based capital stress test for Fannie Mae and Freddie Mac. We study a key component of OFHEO’s model—the performance of 30-year fixedrate mortgages—and find two key problems. First, OFHEO left the model specification and associated parameters static for the entire time the rule was in force. Second, the house prices stress scenario was insufficiently dire. We show how each problem resulted in a significant underprediction of mortgage credit losses and associated capital needs at Fannie Mae and Freddie Mac during the housing bust.

I consider four policies created to address the financial crisis: (1) the ability-to-repay requirement in mortgage underwriting; (2) reform of rating agency compensation, (3) risk retention in securitization, and (4) mandatory loan renegotiation. I show that according to standard models, policies (1)-(3) do not address the standard asymmetric information problems that afflict financial markets. Policy (4) could reduce the deadweight losses associated with asymmetric information but requires that policy makers allocate gains and losses.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

I consider four policies created to address the financial crisis: (1) the ability-to-repay requirement in mortgage underwriting; (2) reform of rating agency compensation, (3) risk retention in securitization, and (4) mandatory loan renegotiation. I show that according to standard models, policies (1)-(3) do not address the standard asymmetric information problems that afflict financial markets. Policy (4) could reduce the deadweight losses associated with asymmetric information but requires that policy makers allocate gains and losses.

We explore several different explanations of the effect of foreclosures on neighboring properties using a dataset of transactions in Boston, for which we have rich data on the size and location of condominium associations. There is compelling evidence against a supply effect—nearby condo foreclosures in different associations, and even those within the same association but at different physical addresses, have little impact on condo sale prices. However, condos transact at average discounts of 2.4 percent when a foreclosure shares the same physical address. We view the results as indicating that investment externalities drive foreclosures’ impacts on neighboring house prices.

Using new household level data, we quantitatively assess the roles that (i) job loss, (ii) negative equity, and (iii) wealth (including unsecured debt, liquid, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5-13 percentage points, ceteris paribus, compared to the sample average default rate of 3.9%. We also find that only 13.9% of defaulters have both negative equity and enough liquid or illiquid assets to make 1 month’s mortgage payment. This suggests that “ruthless,” or “strategic” default during the 2007-2009 recession is relatively rare, and suggests that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

This paper presents 12 facts about the mortgage market. The authors argue that the facts refute the popular story that the crisis resulted from financial industry insiders deceiving uninformed mortgage borrowers and investors. Instead, they argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. The authors then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.

In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

Surprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifications are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced substantial rate reductions over the past years and are largely immune to these selection concerns. We find that payment size has an economically large effect on repayment behavior; for instance, cutting the required payment in half reduces the delinquency hazard by about 55 percent. Importantly, the link between payment size and delinquency holds even for borrowers who are significantly underwater on their mortgages. These findings shed light on the driving forces behind default behavior and have important implications for public policy.

We evaluate the effects of laws designed to protect borrowers from foreclosure. We find that these laws delay but do not prevent foreclosures. We first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a build-up in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. We next analyze a “right-to-cure” law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, we compare Massachusetts with neighboring states that did not adopt similar laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

Many have argued that laws that give borrowers additional rights can help prevent unnecessary foreclosures by giving borrowers more time to cure their delinquencies or by facilitating workouts. We first compare states that allow power-of-sale foreclosures with states that do not and find that preventing power-of-sale foreclosures extends the foreclosure timeline dramatically but does not, in the long run, lead to fewer foreclosures. Borrowers in states that allow power-of-sale foreclosure are no less likely to cure and no less likely to renegotiate their loans. We then exploit a "right-to-cure" law instituted in Massachusetts in May 2008. We employ a differences-in-differences approach to evaluate the effect of the policy, comparing Massachusetts with neighboring states that did not adopt such laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

This paper assesses the impact of the mortgage crisis on Chelsea, Massachusetts, a low-and-moderate-income community of 35,000 adjacent to Boston. After years of rapid growth, house prices started falling in 2005. According to our repeat-sales indices, by the end of 2009 prices had fallen by as much as 50 percent from their peak. Foreclosures have soared and lenders have repossessed or allowed short sales on more than 330 homes, resulting in a forced exit of at least one in 30 of the town's households. A large fraction of the foreclosed properties were two- or three-family homes, so the number of households affected by the crisis undoubtedly extends beyond the number of foreclosures. But there is some positive news. After a slow start, servicers appear to have become far more efficient at selling foreclosed properties, so the stock of real estate owned properties has been falling since 2008. For the most part, homeowners who bought prior to the peak of the boom have so far avoided selling in the moribund market and thus are poised to gain if and when the market recovers. In addition, the crisis has not prevented homeowners from maintaining and improving their properties: both the number and the dollar value of building permits have held up well even for those homeowners who have bought recently and likely have negative equity in their homes.

This paper measures the effects on the primary U.S. mortgage market of the large-scale asset purchase (LSAP) program in which the Federal Reserve bought $1.25 trillion of mortgage-backed securities in 2009 and 2010. We use an event-study approach and measure the movements in both prices and quantities around the initial announcement of the LSAP and subsequent changes to the program. We use a new dataset to document the changes in the menu of rates and points offered to borrowers and show that there was wide dispersion in the rate changes generated by the announcement of the LSAP program, with some borrowers seeing immediate rate reductions of up to 40 basis points and other borrowers confronting rate increases. We show that the LSAP program led to a substantial boost in market activity, with discontinuous increases in searches, applications and originations for refinance mortgages, but not purchase mortgages. Finally, we show that more creditworthy borrowers were significantly more likely to benefit from the improved credit availability.

This paper measures the effects on the primary U.S. mortgage market of the large-scale asset purchase (LSAP) program in which the Federal Reserve bought $1.25 trillion of mortgagebacked securities in 2009 and 2010. We use an event-study approach and measure the movements in both prices and quantities around the initial announcement of the LSAP and subsequent changes to the program. We use a new dataset to document the changes in the menu of rates and points offered to borrowers and show that there was wide dispersion in the rate changes generated by the announcement of the LSAP program, with some borrowers seeing immediate rate reductions of up to 40 basis points and other borrowers confronting rate increases. We show that the LSAP program led to a substantial boost in market activity, with discontinuous increases in searches, applications, and originations for refinance mortgages but not for purchase mortgages. Finally, we show that more creditworthy borrowers were significantly more likely to benefit from the improved credit availability.

This paper develops and estimates an instrumental variables strategy for identifying the causal effect of securitization on the incidence of mortgage modification and foreclosure based on the early-payment default analysis performed by Piskorsi, Seru, and Vig (2010). Estimation results show that securitized mortgages are more likely to be modified and less likely to be foreclosed on by servicers. These results are consistent with the interpretation in Adelino et al. (2013) that low modification rates are not the result of contract frictions inherent in the mortgage securitization process.

This paper assesses the impact of the mortgage crisis on Chelsea, Massachusetts, a low-and moderate income community of 35,000 adjacent to Boston. After years of rapid growth, house prices started falling in 2005. According to our repeat-sales indices, by the end of 2009 prices had fallen by as much as 50 percent from their peak. Foreclosures have soared and lenders have repossessed or allowed short sales on more than 330 homes, resulting in a forced exit of at least one in 30 of the town's households. A large fraction of the foreclosed properties were two- or three-family homes, so the number of households affected by the crisis undoubtedly extends beyond the number of foreclosures. But there is some positive news. After a slow start, servicers appear to have become far more efficient at selling foreclosed properties, so the stock of real estate owned properties has been falling since 2008. For the most part, homeowners who bought prior to the peak of the boom have so far avoided selling in the moribund market and thus are poised to gain if and when the market recovers. In addition, the crisis has not prevented homeowners from maintaining and improving their properties: both the number and the dollar value of building permits have held up well even for those homeowners who have bought recently and likely have negative equity in their homes.

Understanding the evolution of real-time beliefs about house price appreciation is central to understanding the U.S. housing crisis. At the peak of the recent housing cycle, both borrowers and lenders appealed to optimistic house price forecasts to justify undertaking increasingly risky loans. Many observers have argued that these rosy forecasts ignored basic theoretical and empirical evidence that pointed to a massive overvaluation of housing and thus to an inevitable and severe price decline. We revisit the boom years and show that the economics profession provided little such countervailing evidence at the time. Many economists, skeptical that a bubble existed, attempted to justify the historic run-up in housing prices based on housing fundamentals. Other economists were more uncertain, pointing to some evidence of bubble-like behavior in certain regional housing markets. Even these more skeptical economists, however, refused to take a conclusive position on whether a bubble existed. The small number of economists who argued forcefully for a bubble often did so years before the housing market peak, and thus lost a fair amount of credibility, or they make arguments fundamentally at odds with the data even ex post. For example, some economists suggested that cities where new construction was limited by zoning regulations or geography were particularly "bubble-prone," yet the data shows that the cities with the biggest gyrations in house prices were often those at the epicenter of the new construction boom. We conclude by arguing that economic theory provides little guidance as to what should be the "correct" level of asset prices -- including housing prices. Thus, while optimistic forecasts held by many market participants in 2005 turned out to be inaccurate, they were not ex ante unreasonable.

Following the failure of Lehman Brothers in September 2008, short-term credit markets were severely disrupted. In response, the Federal Reserve implemented new and unconventional facilities to help restore liquidity. Many existing analyses of these interventions are confounded by identification problems because they rely on aggregate data. Two unique micro datasets allow us to exploit both time series and cross-sectional variation to evaluate one of the most unusual of these facilities - the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). The AMLF extended collateralized loans to depository institutions that purchased asset-backed commercial paper (ABCP) from money market funds, helping these funds meet the heavy redemptions that followed Lehman's bankruptcy. The program, which lent $150 billion in its first 10 days of operation, was wound down with no credit losses to the Federal Reserve. Our findings indicate that the facility was effective as measured against its dual objectives: it helped stabilize asset outflows from money market mutual funds, and it improved liquidity in the ABCP market. Using a differences-in-differences approach we show that after the facility was implemented, money market fund outflows decreased more for those funds that held more eligible collateral. Similarly, we show that yields on AMLF-eligible ABCP decreased significantly relative to those on otherwise comparable AMLF-ineligible commercial paper.