Falling Behind: Delinquency and Foreclosure in a Housing Crisis

Job Market Paper

In some European countries, mortgage delinquency rates are much higher than foreclosure rates. The stock of delinquent mortgages peaked at 9% of GDP in the Eurozone periphery and the average length of a delinquency spell was over 10 months. This fact has been largely neglected in the macro-finance literature. This paper provides a framework for understanding why high levels of persistent mortgage delinquency can emerge as an equilibrium outcome during a housing market crisis. Banks tolerate delinquency because the gain to foreclosing is less than the option value of continuing with the delinquent loan. By nesting a straightforward game between debt-distressed households and banks within a quantitative macro-housing model, the option to enter delinquency is shown to significantly attenuate (by roughtly half) the consumption drop during a crisis. Importantly, I show that the ability of households to gain insurance through delinquency is significantly impacted by the degree of recourse available to banks upon foreclosure. The model features realistic lifecycle dynamics, tenure choice between renting and owning, endogenous liquidity in the housing market and defaultable, long-term debt.

Capital Regulation With Sovereign and Bank Default

with Luigi Falasconi, Caterina Mendicino and Enrique Mendoza

We study the problem of the regulation of bank holdings of the sovereign debt of their own governments in an environment where both government and bank default are possible. Costs of default are endogenously generated through damage to the banking sector. Due to bank limited liability, domestic banks are able to generate higher expected returns on holding government debt than international investors. In turn, governments are able to sustain high levels of debt when the cost to the banking sector are high. Together, these effects generate high `home bias' in banks' sovereign debt exposure.

Consumer Loans, Heterogeneous Interest Rates and Inequality

Presented at Society for Economic Dynamics conferences - Slides

with Marco Bonomo, Tiago Cavalcanti, Amanda Fantinatti and Cezar Santos

Consumer credit is key to allow individuals to smooth their consumption over time when they are subject to income shocks. Using the Brazilian administrative credit registry data, we document that borrowing rates are very high and vary systematically with individual's characteristics. In particular, even after controlling for several observable individual attributes and default probabilities, low-income individuals pay higher interest rates on their loans than those on the upper tail of the income distribution. We develop a model in which individuals are subject to income shocks and can save and borrow. Borrowing rates vary negatively with individuals' income. We calibrate model parameters such that model moments match those observed for the Brazilian economy, including its consumer credit market. We perform counterfactual analyses in order to assess the impact of the dispersion in borrowing rates on the distribution of consumption and on welfare.

Housing & Rental Markets, Mortgage Policies and the Wealth Distribution

Presented at ECB and Univeristy of St. Gallen - Slides

with Juan Castellanos-Silva and Gonzalo Paz-Pardo

This paper studies the effects of macro-prudential policies such as LTI and LTV constraints on home-ownership, house and rental prices by explicitly modelling the rental market. In so doing, we are able to generate an upward sloping rental supply curve which comes the endogenous distribution of landlords in the economy. As a result, the home-ownership rate falls and the rent-to-house price ratio rises in response to a reduction in the borrowing limit. We calibrate our model to match key features of the Irish economy and study the distributional effects of the 2015 reform to the mortgage market.