Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty

Transcription

1 Houses as ATMs? Mortgage Refinancing and Macroeconomic Uncertainty Hui Chen Michael Michaux Nikolai Roussanov MIT and NBER USC Wharton and NBER May 31, 2014

2 The Question What is the role of housing collateral in financing consumption? Mortgages in U.S. household liabilities, 2012: over 70% Home equity extraction over : $1.7 trillion

3 The Question What is the role of housing collateral in financing consumption? Mortgages in U.S. household liabilities, 2012: over 70% Home equity extraction over : $1.7 trillion Great Moderation (Campbell and Hercowitz 2004) Home-equity based borrowing the main force behind run-up in household leverage from 2002 to 2006 (Mian and Sufi 2010) Subsequent decline in consumption stronger in high leverage areas (Mian, Rao, Sufi 2013)

4 Cash-out Refinancing and Consumption The very low level of interest rates... encouraged household spending through a variety of channels.... The lowest home mortgage rates in decades were a major contributor... engendering a large extraction of cash from home equity. A significant part of that cash supported personal consumption expenditures and home improvement. In addition, many households took out cash in the process of refinancing, often using the proceeds to substitute for higher-cost consumer debt. - Alan Greenspan, Congressional Testimony, February 11, 2004

5 Refinancing Comoves with Interest Rates R 30y Refi Refinancing and Mortgage Rate Changes Jan90 Jan92 Jan94 Jan96 Jan98 Jan00 Jan02 Jan04 Jan06 Jan08 Jan10 Jan12 Regressions

6 Refinancing Comoves with the Business Cycle IP Refi Refinancing and Industrial Production Jan90 Jan92 Jan94 Jan96 Jan98 Jan00 Jan02 Jan04 Jan06 Jan08 Jan10 Jan12 Regressions

7 Cash-out and Rate Ratios over the Business Cycle 100 A. Components of refinances Percentage of Refis cash-out 40 no change 20 pay-down B. Ratio of new to old loan rates New Rate/Old Rate Regressions

8 Overview of Results Develop and estimate a rational model of home-equity based borrowing by liquidity-constrained households: counter-cyclical idiosyncratic labor income uncertainty long-term mortgages + borrowing constraints targeting assets, debt, and refinancing behavior

9 Overview of Results Develop and estimate a rational model of home-equity based borrowing by liquidity-constrained households: counter-cyclical idiosyncratic labor income uncertainty long-term mortgages + borrowing constraints targeting assets, debt, and refinancing behavior Time series: feeding in history of macro shocks, model reproduces dramatic rise in housing debt over sharp contraction in consumption afterwards

10 Overview of Results Develop and estimate a rational model of home-equity based borrowing by liquidity-constrained households: counter-cyclical idiosyncratic labor income uncertainty long-term mortgages + borrowing constraints targeting assets, debt, and refinancing behavior Time series: feeding in history of macro shocks, model reproduces dramatic rise in housing debt over sharp contraction in consumption afterwards Cross section: absent ex ante heterogeneity, wide dispersion in refi behaviors heterogeneous consumption paths for households with different boom-time leverage

11 Overview of Results Develop and estimate a rational model of home-equity based borrowing by liquidity-constrained households: counter-cyclical idiosyncratic labor income uncertainty long-term mortgages + borrowing constraints targeting assets, debt, and refinancing behavior Time series: feeding in history of macro shocks, model reproduces dramatic rise in housing debt over sharp contraction in consumption afterwards Cross section: absent ex ante heterogeneity, wide dispersion in refi behaviors heterogeneous consumption paths for households with different boom-time leverage Policy implications: refi sensitivity to monetary policy

12 Preview: Leverage Run-up

13 Related Literature Mortgage refinancing: Boudoukh, Richardson, Stanton and Whitelaw (1997), Stanton (1995), Downing, Stanton and Wallace (2005), Deng et. al. (2000), Gabaix, Krishnamurthy, and Vigneron (2007), Duarte, Longstaff and Yu (2007) Housing wealth and consumption: Campbell and Cocco (2007), Caplin, Freeman, and Tracy (1997), Lustig and Van Nieuwerburgh (2010), Attanasio, Leicester, and Wakefield (2011), Carroll, Otsuka, and Slacalek (2011), Case, Quigley, and Shiller (2011), Calomiris, Longhofer, and Miles (2012) Consumption smoothing and cash-out: Hurst and Stafford (2004)

14 Household States: Homeownership, Default, and Renting

15 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t

16 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t

17 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t Inflation: π = P t+1 /P t

18 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t Inflation: π = P t+1 /P t House price: P H t = H P t Y t p H t

19 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t Inflation: π = P t+1 /P t House price: P H t = H P t Y t p H t Aggregate state: S = (Z, r, p H ) log S t+1 = µ S + φ S log S t + Σ S ɛ S t+1

20 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t Inflation: π = P t+1 /P t House price: P H t = H P t Y t p H t Aggregate state: S = (Z, r, p H ) log S t+1 = µ S + φ S log S t + Σ S ɛ S t+1 Individual labor income: y i,t = P t Y t ỹ i,t

21 Exogenous shocks Real aggregate income growth: Z t+1 = Y t+1 /Y t Short-term (nominal) interest rate: r t Inflation: π = P t+1 /P t House price: P H t = H P t Y t p H t Aggregate state: S = (Z, r, p H ) log S t+1 = µ S + φ S log S t + Σ S ɛ S t+1 Individual labor income: y i,t = P t Y t ỹ i,t ỹ i idiosyncratic labor income log ỹ i,t+1 = log µ y (Z t ) + ρ y log ỹ i,t + σ(z t )ɛ y i,t+1

22 Preferences Epstein-Zin Preferences: [ [ U t = (1 δ) X 1 γ θ t + δe t θ = 1 γ 1 1 ψ U 1 γ t+1 ] 1 ] θ 1 γ θ X t : Cobb-Douglas aggregator of nonhousing consumption and housing services X t = (h t Y t ) ν (c t /P t ) 1 ν

23 Households Taxes: labor income and interest income taxed at rate τ Liquid assets: a i,t, earning interest at rate r t House: House size: h i,t Transaction cost: proportional cost φ h Homeowners: Short-term secured borrowing (HELOC): at rate rt HL = r t + ϑ Long-term (and illiquid) mortgage: b i,t, with mortgage rate k i,t Renters: aggregate rent-to-income ratio ϖ

24 Long-term mortgages Interest-only mortgage: Fixed-rate Interest payments k i,t b i,t are tax deductible Refinancing: Option to refinance: reset k i,t to market rate R t = R(S t ) Transaction cost: φ(b) = P t Y t φ 0 + φ 1 b (P)repayment: Option to reduce mortgage balance costlessly Option to default (on mortgage and HELOC jointly): Lose house and portion 1 ζ of liquid assets Temporarily excluded from housing market; rate of re-entry ω Bellman equations

25 Borrowing constraints Collateral (LTV) constraints: b i,t+1 + HELOC i,t+1 ξ LTV P H t h i,t Debt service (LTI) constraints: b i,t+1 + HELOC i,t+1 ξ LTI y i,t HELOC limit: HELOC i,t+1 ap t Y t Long vs. short-term debt: LTV and LTI imposed on HELOC every period; only at refinancing and origination for mortgage

26 Preemptive refinancing Households with no immediate liquidity needs might preemptively refinance before the constraints become binding LTI: cash-out when aggregate labor income growth drops, and when idiosyncratic labor income uncertainty rises LTV: cash-out when house prices are sufficiently high

27 Simulated moments estimation Three-step estimation procedure: 1. Estimate/calibrate exogenous state variable dynamics 2. Calibrate pre-set institutional parameters 3. Estimate structural parameters of interest by targeting auxiliary statistics of simulated data moments of assets, debt, and consumption dynamics of refinancing and cash-out

28 Calibration and Estimation Household state vector: a i, h i, b i, k }{{} i, y i, Z, r, p H }{{} endogenous exogenous Aggregate state S = (Z, r, p H ): restricted VAR(1) in logs; estimated using GDP, 1-year T-bill rate, and S&P Case-Shiller HPI Idiosyncratic labor income process: AR(1) process in logs, with heteroscedasticity (Storesletten, Telmer, Yaron, 2004) Mortgage rate R: function of aggregate states log R(S) = κ 0 + κ 1 log S + κ 2 (log p H t ) 2 Estimated using 30-year FRM rate

29 Discretized aggregate state variables Zt A. Aggregate income growth p H t B. Transitory component in house price C. Short-term interest rate 0.12 D. Long-term mortgage rate rt Rt Time Time

30 Exogenous Institutional Parameters Parameter Value Description τ 0.25 Income tax rate H 4 Average house price to income ratio ξ LTV 0.8 Collateral constraint ξ LTI 3.5 Debt service constraint a 30% Max HELOC balance as fraction of avg. income ω 0.15 Probability of return to credit market after default ζ 1 Retention of liquid assets upon default ϑ 0.04 Interest rate premium on HELOC

31 Estimation Approach: 8 parameters/14 moments Simulated Method of Moments: Estimate the vector of model parameters Θ (δ, γ, ψ, η, φ 0, φ 1, φ h ) such that ˆΘ = arg min (M Θ m(θ)) W (M m(θ)) Parameter Description Preferences δ Subjective discount rate γ Risk aversion ψ Intertemporal elasticity of substitution ν Utility share of housing η Indirect (dis)utility of renting (vs home-ownership) Transaction φ 0 Fixed cost of issuing new mortgage Costs φ 1 Proportional cost of issuing new mortgage φ h Proportional cost of buying/selling a house Use pre-specified weighting matrix W; simulation-based inference

32 Estimation Approach: 8 parameters/14 moments Model Data Consumption/Income, average c/py 0.66 Consumption growth volatility, average σ( log ct+1) i 9% Homeownership rate E[I h ] 60% Liquid Asset Holdings/Income (homeowners) a/py 0.28 Mortgage Balance/Income b/py 0.98 Refinancing rate REFI 8% HELOC Balance/Income a /py 0.07 Refinancing Loan/Income b /py 1.41 Dollar Cash-out (as a share of Refi) (b b) + /b 0.12 Liquid Asset Holdings/Income (renters) a/py 0.18 Refinancing Regression: Details Coefficient on Z βz REFI 0.25 Coefficient on log H βh REFI 0.15 Cashout Regression: Details Coefficient on Z β Z 0.13 Coefficient on log H β H 0.06

33 Estimated parameters Parameter Value Description Preferences δ Subjective discount rate (0.007) γ Risk aversion (0.347) ψ Intertemporal elasticity of substitution (0.020) ν Housing utility share (0.004) η Disutility of renting versus home-ownership (0.006) Institutional φ Fixed cost of issuing new mortgage (0.020) φ Proportional cost of issuing new mortgage (0.008) φ h Proportional cost of buying/selling a house (0.017)

34 Estimation results: targeted moments Moment Variable Data Model s.e. All Households: 1. Consumption/Income c i /y i Consumption growth volatility, % σ( log c i,t+1 ) 9(18) Homeownership rate, % E[I h ] Homeowners: 4. Liquid assets/income a + i /y i Mortgage/Income b i /y i HELOC/Income a i /y i Refinancing rate, % of homeowners REFI Refi loan/income b i /y i Dollar cash-out/refi loan (b i b i) + /b i Renters: 10. Liquid assets/income a + i /y i Refinancing Regression: 11. Coefficient on Z βz REFI Coefficient on log H βh REFI Cashout Regression: 13. Coefficient on Z β Z Coefficient on log H β H

35 Estimation results: additional moments Moment Variable Data Model s.e. Volatility of agg. consumption growth, % σ( log C t+1) Sensitivity of consumption to Z shocks βz C Sensitivity of consumption to H shocks βh C Sensitivity of consumption to lagged r βr C Sensitivity of consumption to lagged R βr C Refinancing regression coefficient on R βr REFI Cashout regression coefficient on R β R

36 Quintiles sorted on income and debt/income 2 A. Cash-out for refi loans B. Cash-out for refi loans a/y (b b) + /y C. Asset holding E. Rate ratio a/y (b b) + /y D. Asset holding Pre-refi Post-refi F. Rate ratio k /k 1 k /k Low income High income Low debt/income High debt/income

37 Model vs. Data (sorted on income/house value and debt/income, SCF) 4 2 A. Loan-to-income ratio 4 2 B. Loan-to-income ratio model data C. Loan-to-value ratio D. Loan-to-value ratio E. Annual refinancing rate, % Low income High income F. Annual refinancing rate, % Low debt/income High debt/income

38 Aggregate time series 0.15 A. Real consumption growth B. Rate ratio

39 Experiment: replicating Mian-Sufi evidence Feed in alternative time series Inelastic MSAs : model with 2x volatility of p H shocks Elastic MSAs : p H = 1 (house prices comove with income)

40 Mian-Sufi experiment: Leverage Run-up

41 Leverage-sorted groups during crisis (model) 0.15 A. Consumption vs B. Liquid assets/income ln(ct/c2006) a + /y C. Debt/Income 0.35 D. Refinancing rate b/y REFI

42 Conclusion Standard model able to account for the dynamics of household leverage and consumption over the boom and the bust periods Financing frictions have quantitatively large effects on household finance and consumption Long vs. short-term debt: deleveraging effect substantial even with long-maturity debt Precautionary savings in liquid assets vs. illiquid home equity Substantial heterogeneity in refi and consumption behavior in response to monetary shocks and government programs (e.g., HARP and FHA loans)

43 Aggregate-level regression: REFI Regression: REFI t = b 0 + b IP IP t + b r30r 30Y t + b HPI HPI t +b r R 3M t + b r30 R 30Y t + ɛ t MBA REFI Index (# of loans, refinancing only) Back Monthly data, January March 2011.

44 Aggregate Refinancing Activity IP t (0.161) (0.087) (0.097) (0.091) HPI t (0.098) (0.095) (0.095) Rt M (0.667) (0.675) (0.601) Rt M30 Rt 12 M (0.845) Rt M30 Ravg,t M (1.247) rt 1Y (0.611) (0.566) (0.496) Adj. R

45 Aggregate-level regression: $ Home Equity Withdrawal Regression: HEW j t = β j 0 + βj Z PIt + βj H HPIt + βj R RM30 t + β j Rl RM30 t + βr j rt 1Y + ɛ t. where j {Cash-out, HELOC} Freddie Mac, $ Cash-out (over year-ago personal income) Fed Flow of Funds Accounts, $ Home equity loans and lines of credit (over year-ago personal income) Quarterly data, Q Q Back to Intro Structural Estimation

46 Home Equity Withdrawal Prime, first-lien mortgage HEL(OC)s PI t (0.051) (0.041) (0.042) (0.041) (0.032) (0.031) HPI t (0.023) (0.021) (0.018) (0.016) Rt M (0.146) (0.133) (0.112) (0.099) Rt M30 Rt 1 M (0.084) (0.063) rt 1Y (0.099) (0.087) (0.076) (0.065) Adj. R

47 Exploiting State-Level Variation At the state level, macroeconomic conditions are less likely to comove with interest rates Variation in the ability to use housing collateral (prices vary) - Caplin, Freeman and Tracy (1997) - Lustig and Van Nieuwerburgh (2010) - Mian and Sufi (2010) - Case, Quigley and Shiller (2011) - Midrigan and Philippon (2011) Use state-level aggregations of HMDA data - all originated loans

48 Business Cycle and Refinancing: State Level Variation Quarterly refi loans (scaled by population): REFI State t = b Cycle Cycle State t + b CH Cycle State t + b r R 3M t + b r30r 30Y t + b HPI HPI State t HPI State t + b R R State t + b w WAC State t + b r30 R 30Y t + b t + b State + ɛ t, BC = Payroll, Coincident Economic Activity Index or Personal Income Growth Quarterly data, March December 2007

49 Refi Loan Originations R 3M t R 30Y t R 2 BC HPI t BC HPI t WAC t R t Rt 30Y BC = Payroll ( 0.05) ( 0.01) ( 0.39) ( 0.05) ( 0.22) ( 0.12) ( 0.06) ( 0.12) ( 0.05) ( 0.01) ( 0.20) ( 0.67) ( 0.37) BC = CEAI ( 0.03) ( 0.01) ( 0.34) ( 0.05) ( 0.23) ( 0.12) ( 0.07) ( 0.12) ( 0.03) ( 0.01) ( 0.13) ( 0.69) ( 0.37) BC = Personal Income ( 0.03) ( 0.01) ( 0.37) ( 0.05) ( 0.26) ( 0.13) ( 0.07) ( 0.13) ( 0.03) ( 0.01) ( 0.22) ( 0.70) ( 0.39)

50 Household Problem: Home-owner U h i (a i, b i, k i, s i ) = max a i,b i,i RF i [ (1 δ)(c i /p) 1 γ θ [ + δe max (U h i, U hr i ) ] 1 ] θ 1 γ 1 γ θ, Ui hd subject to a + i c i (1 τ)r + a i 1 + r + b HL i = (1 τ)(y i k i b i ) + a i + b i φ(b i ) I RF (b i b i ) (1 I RF i ) 0, c i, b i 0, i, and the borrowing constraints

51 Household Problem: Renter Renters: Incur a rental expense: share η of per period income 1+η U r i (a i, s i ) = max a i subject to, [ (1 δ)(c i /p) 1 γ θ [ ) ] 1 ] θ + δe max (U i rh, U r 1 γ 1 γ θ i y i c i = (1 τ) 1 + η }{{} After Tax Income a i, c i 0 a i + a i 1 + (1 τ)r }{{} Change in Savings

52 Household Problem: Default State Households in Default State: Become renters and stay in that state (w.p. 1 ω) Are not allowed to buy a house U d i = max a i [ ) (1 δ)(c i /p) 1 γ 1 γ ) ] 1 ] θ θ +δe [(1 ω) (U i d + ω max (U i rh, U r 1 γ 1 γ θ i subject to, y i c i = (1 τ) 1 + η }{{} After Tax Income a i, c i 0 a i + a i 1 + (1 τ)r }{{} Change in Savings Back to model