Mortgage Rates, Household Balance Sheets, and Real Economy

Mortgage Rates, Household Balance Sheets, and Real Economy May 2015 Ben Keys University of Chicago Harris Tomasz Piskorski Columbia Business School and NBER Amit Seru Chicago Booth and NBER Vincent Yao Fannie Mae

Motivation Long-standing debate on real effects of monetary policy Extraordinary recent actions to keep rates low Residential mortgage market believed to play an important role in the transmission of monetary policy Homes and mortgage debt as key household asset and liability Adjustable rate mortgages (ARMs) represent frictionless pass-through Empirical evidence on the impact of lower mortgage rates on households/broader economy fairly limited Data limitations Identification challenges 2

This Paper Provide novel evidence on the impact of lower rates on households and broader economy during the crisis Micro: Household balance sheet and (inferred) consumption Credit card debt, auto financing Regional: Broader economy House prices, durable consumption, employment Speak to policies on mortgage market rules/regulations Significant debate regarding the relative magnitudes Does debt deleveraging limit consumption response? (Agarwal et al. 2012, Mian and Sufi 2013) Mortgage modification programs, programs facilitating refinancing Remove institutional frictions in implementation of policies [HAMP/HARP] since all eligible households receive rate reduction 3

Contribute to literature on Related Literature Monetary transmission mechanism Household response to income shocks & (fiscal) stimulus programs Mortgage payments reduction / modification on defaults Household behavior during recent crisis We add to the literature in significant ways Significant stimulus spaced over time in contrast to one-time income increase Impact of lower mortgage rates on consumer debt and other economic outcomes Closely related to concurrent work by Di Maggio et al. 2014 4

Empirical Challenges Hard to empirically assess impact of lower interest rates Rates endogenous with either borrower characteristics and/or macroeconomic environment Our approach At micro level: Exploit variation in ARM contract types across borrowers to generate variation in rates faced by similar households At regional level: Exploit variation in distribution of contract types (ARM share) across similar regions 5

Micro Data Proprietary data from a secondary market participant Detailed monthly loan-level panel data Mortgage performance data Loan balances, current interest rate, mortgage type, payments, delinquency status, location (zip code) Consumer credit records Credit card balances, auto loans, student loans, credit inquiries, payment status, current credit score (FICO) Records matched using borrower SSN Dataset representative of most U.S. mortgage borrowers More than 350,000 agency borrowers 6

Baseline Micro Evidence

7/1 ARM 5.1% Teaser Adjusts to 2% + TR 6% 5% 4% 3% 2% 1% 0% 1% 6% 5% Treasury Rate 2005 2006 2007 2008 2009 2010 2011 2012 Mortgage Rate 4% 5/1 ARM 5.0% Teaser Adjusts to 2% + TR 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 8

7/1 ARM 5.1% Teaser Adjusts to 2% + TR 6% 5% 4% 3% 2% 1% 0% 1% 6% 5% Treasury Rate 2005 2006 2007 2008 2009 2010 2011 2012 Mortgage Rate 4% 5/1 ARM 5.0% Teaser Adjusts to 2% + TR 3% 2% 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 9

7/1 ARM 5.1% Teaser Adjusts to 2% + TR 6% 5% 4% 3% 2% 1% 0% 1% 6% 5% Treasury Rate 2005 2006 2007 2008 2009 2010 2011 2012 Mortgage Rate 5/1 ARM 5.0% Teaser Adjusts to 2% + TR 4% 3% 2% Our Focus 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 10

7/1 ARM 5.1% Teaser Adjusts to 2% + TR 6% 5% 4% 3% 2% 1% 0% 1% 6% 5% Treasury Rate 2005 2006 2007 2008 2009 2010 2011 2012 Mortgage Rate 5/1 ARM 5.0% Teaser Adjusts to 2% + TR 4% 3% 2% Our Focus 1% 0% 2005 2006 2007 2008 2009 2010 2011 2012 11

Rate Resets and Interest Rates Control (7/1) Treatment (5/1) 12

Rate Resets and Mortgage Payments Control (7/1) Treatment (5/1) Mortgage Payments are reduced by $1,500 (on average) in the first year, and by $3,434 over two years 13

Impact on Mortgage Default (Two Years Out) Interest Current Mortgage Rate Payment Delinquency Treatment -1.75-163.54-0.018 (0.14) (10.91) (0.01) Number of Loans 348,259 348,259 348,259 Adjusted R-squared 0.891 0.251 0.064 Mortgage Payments: Reduction by average $3,434 over two years Associated with 36% relative decrease in mortgage default (1.8 pp) Diff-in-diffs Identification Assumption: In the absence of 5/1 ARM rate reset, relevant outcomes of 5/1 ARMs follow a similar pattern as 7/1 ARM borrowers (up to a constant difference) 14

Impact on Revolving Debt Balance Treatment (5/1) Control (7/1) 19% of extra liquidity from lower mortgage payments allocated to revolving (credit card) debt repayment over two years 15

Impact on Durable Financing (Auto Debt) Treatment (5/1) Control (7/1) 10% of additional liquidity goes towards increased auto debt 16

Impact on Probability of New Auto Financing 6.0% 5.5% 5.0% Treatment (5/1) 4.5% 4.0% Control (7/1) 3.5% 3.0% Q4 Q3 Q2 Q1 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 10% relative increase in new car financing 17

Cross-Sectional Heterogeneity 18

Debt Deleveraging: Liquidity Constrained Top Quartile Credit Utilization Change in Revolving Debt -$1284.9 (321.4) Bottom Quartile Credit Score -$1206.4 (280.7) As % of Mortgage Payment Reduction 70.6% 65.1% Very significant debt repayment (deleveraging) in the bottom quarter of liquidity-constrained borrowers Key target of many interventions MPC often viewed as high in this group But upper bound MPC of 0.35 0.31 Not surprising that marginal dollar allocated to high cost credit card debt in first year 19

Heterogeneity across Wealth/Liquidity Constraints Wealth constrained show: Bigger improvement in mortgage delinquency Significantly larger increase in new auto debt financing No difference in debt paydown Liquidity constrained show: Larger reduction in credit card debt No increase in new auto debt financing Complex interaction across measures of wealth and liquidity constraints Traditional response: Lower-wealth households are more responsive to income shock, but less so if they have a large credit card debt burden 20

Regional Analysis 21

Empirical Strategy Exploit regional variation in share of ARMs Regions with more ARMs more exposed to lower rates Similar to Mian and Sufi (2011) and Agarwal et al. (2012) in the context of Cash-for-clunkers and HAMP programs Ex-ante measure of exposure to interest rate declines Zip code ARM share as of Q2 2007 predicts treatment intensity Construct sample of similar zip codes Matched on observables (FICO, LTV, interest rate, etc.) Similar results in IV framework (using all zips) Investigate impact on economic outcomes Mortgage defaults, house prices, durable consumption (auto) and employment 22

Mortgage Rate: High & Low Exposure ZIP Codes 8.0 7.5 7.0 6.5 Control 6.0 5.5 5.0 Treatment 4.5 4.0 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4 Interpreting size of first stage: - 100% ARM share would lead to a decrease of 175 bp in mortgage rate 23

HP Growth: High & Low Exposure ZIP Codes 4 3 2 1 0 1 2 3 4 5 6 Control Treatment 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4 24

Auto Growth: High & Low Exposure ZIP Codes 30% 20% 10% 0% Control 10% 20% Treatment 30% 2007 2008 2009 2010 2011 2012 25

Employment Growth: High & Low Exposure ZIP Codes 3 2 1 0 1 2 3 4 5 Treatment Control 6 2007 2008 2009 2010 2011 2012 All of the employment response comes from non-tradable sector e.g. restaurants and grocery stores 26

Discussion Low interest rate policies have had meaningful impact on household spending and broader economy Supports view that shocks to household balance sheets important factor affecting employment Will we see reversal when stimulus withdrawn? Partial estimates suggest that 20% relative reduction in average mortgage rates in a region results in: +3.5% increase in the annual house price growth rate +5% increase in the annual auto purchase growth rate +3% increase in the non-tradable employment growth rate Caveats: Cannot quantify overall impact (GE effects) Generic limitation of diff-in-diffs regional analyses 27

Conclusions Household debt deleveraging can significantly limit the ability to simulate household consumption Significant part of stimulus due to lower rates transferred to the banking sector Target polices to alleviate high cost of credit card debt? ARM contracts facilitate simple transmission of policy Avoid institutional frictions impacting HARP and HAMP Circumvent inability to refinance (e.g. due to negative equity) 28

Bonus Slides 29

Impact on New Credit Inquiries: One Year Horizon Interest Current Recent Rate Payment Inquiries Treatment -1.14-125.08 0.041 (0.30) (24.52) (0.021) Number of Loans 348,259 348,259 348,259 Adjusted R-squared 0.557 0.226 0.081 30

Impact on New Credit Inquiries: Two Year Horizon Interest Current Recent Rate Payment Inquiries Treatment -1.75-163.54-0.099 (0.14) (10.91) (0.017) Number of Loans 348,259 348,259 348,259 Adjusted R-squared 0.891 0.251 0.083 31

Impact on Overall Credit Standing: Two Year Horizon Interest Current Current Rate Payment FICO Treatment -1.75-163.54 5.68 (0.14) (10.91) (1.14) Number of loans 348,259 348,259 348,259 Adjusted R-squared 0.891 0.251 0.07 Mortgage Payments: Reduction by average $3,434 over two years Meaningful improvement in credit standing Change in composition of debt leads to overall improvement 32

Quarterly Differential Change in Auto Debt Balance for Borrowers with Agency Mortgages $200 $150 $100 $50 $0 $50 $100 Q3 Q2 Q1 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 33

Quarterly Differential Change in Auto Debt Balance for Borrowers with Non-Agency Mortgages $400 $350 $300 $250 $200 $150 $100 $50 $0 $50 $100 Q3 Q2 Q1 Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8 34

Distribution of Credit Scores & Revolving Debt Balances for Loans in Month 60 35

Mortgage Delinquency, House Price & Auto Sales Growth and ZIP Code ARM Share 36

Distribution of CLTV Ratios 37

Impact Heterogeneity: By Credit Utilization One Year Horizon Current Current Interest Rate Payment 5/1 ARM -0.065-23.543 (0.0016) (2.31) Loan Age > 60 0.002-24.826 (0.0017) (3.01) 5/1 ARM * Loan Age>60-0.915-116.033 (0.005) (3.61) 5/1 ARM * Loan Age>60-0.421-16.140 * Util>M (0.0067) (5.04) Number of loans 286,990 286,990 Adjusted R-squared 0.526 0.197 Mortgage Payments: Similar rate decline across two groups 38

Impact Heterogeneity: By Credit Utilization Two Year Horizon Current Current Interest Rate Payment 5/1 ARM -0.038-21.621 (0.0009) (2.31) Loan Age > 60 0.003-56.432 (0.0012) (3.51) 5/1 ARM * Loan Age>60-1.633-158.419 (0.0029) (4.05) 5/1 ARM * Loan Age>60-0.230-5.326 * Util>M (0.004) (5.55) Number of loans 286,990 286,990 Adjusted R-squared 0.889 0.216 Mortgage Payments: Similar rate decline across two groups 39

Impact Heterogeneity: By Credit Utilization One Year Horizon Current Current Mortgage Interest Rate Payment Delinquency 5/1 ARM -0.065-23.543 0.009 (0.0016) (2.31) (0.0006) Loan Age > 60 0.002-24.826 0.003 (0.0017) (3.01) (0.0008) 5/1 ARM * Loan Age>60-0.915-116.033-0.002 (0.005) (3.61) (0.0011) 5/1 ARM * Loan Age>60-0.421-16.140-0.007 * Util>M (0.0067) (5.04) (0.0023) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.526 0.197 0.069 Mortgage Payments: Similar rate decline across two groups Much stronger impact on defaults of more liquidity constrained 40

Impact Heterogeneity: By Credit Utilization Two Year Horizon Current Current Mortgage Interest Rate Payment Delinquency 5/1 ARM -0.038-21.621 0.009 (0.0009) (2.31) (0.0006) Loan Age > 60 0.003-56.432 0.008 (0.0012) (3.51) (0.0011) 5/1 ARM * Loan Age>60-1.633-158.419-0.007 (0.0029) (4.05) (0.0014) 5/1 ARM * Loan Age>60-0.230-5.326-0.022 * Util>M (0.004) (5.55) (0.003) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.889 0.216 0.064 Mortgage Payments: Similar rate decline across two groups Much stronger impact on defaults of more liquidity constrained 41

Impact Heterogeneity: By Credit Utilization One Year Horizon Current Current Revolving Delinquent Utilization Interest Rate Payment Balance Revolving Balance Rate 5/1 ARM -0.065-23.543 15.533 0.002 0.985 (0.0016) (2.31) (33.05) (0.0004) (0.107) Loan Age > 60 0.002-24.826 190.243-0.002 0.738 (0.0017) (3.01) (42.28) (0.0005) (0.066) 5/1 ARM * Loan Age>60-0.915-116.033 199.478-0.001 0.061 (0.005) (3.61) (54.35) (0.0009) (0.09) 5/1 ARM * Loan Age>60-0.421-16.140-968.231 0.005-0.162 * Util>M (0.0067) (5.04) (206.01) (0.002) (0.48) Number of loans 286,990 286,990 286,990 286,990 286,990 Adjusted R-squared 0.526 0.197 0.212 0.094 0.097 Mortgage Payments: Similar rate decline across two groups More liquidity constrained (above median credit util.) allocate about 50% of extra liquidity to credit card repayment in the first year 42

Impact Heterogeneity: By Credit Utilization Two Year Horizon Current Current Revolving Delinquent Utilization Interest Rate Payment Balance Revolving Balance Rate 5/1 ARM -0.038-21.621 56.238 0.002 0.917 (0.0009) (2.31) (32.89) (0.0005) (0.12) Loan Age > 60 0.003-56.432 1089.813-0.000 3.724 (0.0012) (3.51) (66.57) (0.00) (0.11) 5/1 ARM * Loan Age>60-1.633-158.419 153.339-0.000 0.117 (0.0029) (4.05) (80.7) (0.00) (0.14) 5/1 ARM * Loan Age>60-0.230-5.326-1341.008-0.011-2.645 * Util>M (0.004) (5.55) (229.23) (0.0026) (0.484) Number of loans 286,990 286,990 286,990 286,990 286,990 Adjusted R-squared 0.889 0.216 0.195 0.089 0.085 Mortgage Payments: Similar rate decline across two groups More liquidity constrained (above median credit util.) allocate about 38% of extra liquidity to credit card repayment in the first year 43

Impact Heterogeneity: By Credit Utilization One Year Horizon Current Current Auto Delinquent Interest Rate Payment Balance Auto Balance 5/1 ARM -0.065-23.543-285.074 7.279 (0.0016) (2.31) (71.792) (5.97) Loan Age > 60 0.002-24.826-245.762-2.823 (0.0017) (3.01) (78.514) (5.88) 5/1 ARM * Loan Age>60-0.915-116.033 62.079-0.078 (0.005) (3.61) (54.976) (7.8) 5/1 ARM * Loan Age>60-0.421-16.140-116.075 4.992 * Util>M (0.0067) (5.04) (53.39) (22.69) Number of loans 286,990 286,990 286,990 286,990 Adjusted R-squared 0.526 0.197 0.014 0.011 Mortgage Payments: Similar rate decline across two groups More liquidity constrained (above median credit util) do not obtain much new car financing in the first year 44

Impact Heterogeneity: By Credit Utilization Two Year Horizon Current Current Auto Delinquent Interest Rate Payment Balance Auto Balance 5/1 ARM -0.038-21.621-303.347 6.996 (0.0009) (2.31) (144.462) (5.93) Loan Age > 60 0.003-56.432-511.526 15.556 (0.0012) (3.51) (241.87) (11.97) 5/1 ARM * Loan Age>60-1.633-158.419 179.984-10.498 (0.0029) (4.05) (100.504) (14.79) 5/1 ARM * Loan Age>60-0.230-5.326-25.500-35.774 * Util>M (0.004) (5.55) (141.121) (26.9) Number of loans 286,990 286,990 286,990 286,990 Adjusted R-squared 0.889 0.216 0.012 0.010 Mortgage Payments: Similar rate decline across two groups At 2 year horizon the adverse effect of high credit utilization on auto financing weakens weakens 45

Impact Heterogeneity: By Credit Utilization Two Year Horizon Current Current Current Interest Rate Payment FICO 5/1 ARM -0.038-21.621-4.856 (0.0009) (2.31) (0.23) Loan Age > 60 0.003-56.432-3.698 (0.0012) (3.51) (0.40) 5/1 ARM * Loan Age>60-1.633-158.419 1.868 (0.0029) (4.05) (0.48) 5/1 ARM * Loan Age>60-0.230-5.326 5.648 * Util>M (0.004) (5.55) (0.86) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.889 0.216 0.450 46

Impact Heterogeneity: By Credit Score One Year Horizon Current Current Interest Rate Payment 5/1 ARM -0.067-24.697 (0.0016) (2.29) Loan Age > 60 0.002-23.563 (0.0018) (2.99) 5/1 ARM * Loan Age>60-0.901-114.026 (0.0048) (3.58) 5/1 ARM * Loan Age>60-0.446-19.880 * FICO<M (0.0067) (5.03) Number of loans 286,990 286,990 Adjusted R-squared 0.527 0.197 Mortgage Payments: Similar rate decline across two groups 47

Impact Heterogeneity: By Credit Score Two Year Horizon Current Current Interest Rate Payment 5/1 ARM -0.039-22.768 (0.0009) (2.29) Loan Age > 60 0.003-55.663 (0.0013) (3.51) 5/1 ARM * Loan Age>60-1.623-155.668 (0.003) (4.04) 5/1 ARM * Loan Age>60-0.247-9.954 * FICO<M (0.004) (5.56) Number of loans 286,990 286,990 Adjusted R-squared 0.890 0.217 Mortgage Payments: Similar rate decline across two groups 48

Impact Heterogeneity: By Credit Score One Year Horizon Current Current Mortgage Interest Rate Payment Delinquency 5/1 ARM -0.067-24.697 0.003 (0.0016) (2.29) (0.0003) Loan Age > 60 0.002-23.563 0.004 (0.0018) (2.99) (0.0005) 5/1 ARM * Loan Age>60-0.901-114.026 0.001 (0.0048) (3.58) (0.001) 5/1 ARM * Loan Age>60-0.446-19.880-0.013 * FICO<M (0.0067) (5.03) (0.0025) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.527 0.197 0.075 Mortgage Payments: Similar rate decline across two groups Much stronger impact on defaults of less creditworthy 49

Impact Heterogeneity: By Credit Score Two Year Horizon Current Current Mortgage Interest Rate Payment Delinquency 5/1 ARM -0.039-22.768 0.003 (0.0009) (2.29) (0.0003) Loan Age > 60 0.003-55.663 0.009 (0.0013) (3.51) (0.0009) 5/1 ARM * Loan Age>60-1.623-155.668-0.003 (0.003) (4.04) (0.001) 5/1 ARM * Loan Age>60-0.247-9.954-0.030 * FICO<M (0.004) (5.56) (0.0028) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.890 0.217 0.071 Mortgage Payments: Similar rate decline across two groups Much stronger impact on defaults of less creditworthy 50

Impact Heterogeneity: By Credit Score One Year Horizon Current Current Revolving Delinquent Utilization Interest Rate Payment Balance Revolving Balance Rate 5/1 ARM -0.067-24.697 636.226 0.000 1.707 (0.0016) (2.29) (54.66) (0.00) (0.125) Loan Age > 60 0.002-23.563 475.554 0.002 0.730 (0.0018) (2.99) (71.40) (0.0004) (0.095) 5/1 ARM * Loan Age>60-0.901-114.026 258.270-0.000 0.185 (0.0048) (3.58) (92.9) (0.00) (0.124) 5/1 ARM * Loan Age>60-0.446-19.880-906.475 0.003-0.138 * FICO<M (0.0067) (5.03) (216.86) (0.0018) (0.493) Number of loans 286,990 286,990 286,990 286,990 286,990 Adjusted R-squared 0.527 0.197 0.123 0.100 0.067 Mortgage Payments: Similar rate decline across two groups Less creditworthy (below median FICO) allocate about 50% of extra liquidity to credit card repayment in the first year 51

Impact Heterogeneity: By Credit Score Two Year Horizon Current Current Revolving Delinquent Utilization Interest Rate Payment Balance Revolving Balance Rate 5/1 ARM -0.039-22.768 670.338-0.000 1.635 (0.0009) (2.29) (54.72) (0.00) (0.139) Loan Age > 60 0.003-55.663 1290.809 0.005 3.402 (0.0013) (3.51) (101.24) (0.0005) (0.138) 5/1 ARM * Loan Age>60-1.623-155.668 12.104 0.000-0.348 (0.003) (4.04) (121.04) (0.00) (0.169) 5/1 ARM * Loan Age>60-0.247-9.954-1007.830-0.012-1.685 * FICO<M (0.004) (5.56) (241.69) (0.0025) (0.497) Number of loans 286,990 286,990 286,990 286,990 286,990 Adjusted R-squared 0.890 0.217 0.112 0.095 0.060 Mortgage Payments: Similar rate decline across two groups Less creditworthy (below median FICO) allocate about 36% of extra liquidity to credit card repayment over two years 52

Impact Heterogeneity: By Credit Score One Year Horizon Current Current Auto Delinquent Interest Rate Payment Balance Auto Balance 5/1 ARM -0.067-24.697-43.630-1.978 (0.0016) (2.29) (49.574) (1.55) Loan Age > 60 0.002-23.563-212.162 1.076 (0.0018) (2.99) (79.675) (1.99) 5/1 ARM * Loan Age>60-0.901-114.026 177.076 0.775 (0.0048) (3.58) (66.996) (4.31) 5/1 ARM * Loan Age>60-0.446-19.880-293.164 2.504 * FICO<M (0.0067) (5.03) (76.383) (22.76) Number of loans 286,990 286,990 286,990 286,990 Adjusted R-squared 0.527 0.197 0.014 0.012 Mortgage Payments: Similar rate decline across two groups Less creditworthy (below median credit score) do not obtain much new car financing in the first year 53

Impact Heterogeneity: By Credit Score Two Year Horizon Current Current Auto Delinquent Interest Rate Payment Balance Auto Balance 5/1 ARM -0.039-22.768-62.633-2.216 (0.0009) (2.29) (47.745) (1.59) Loan Age > 60 0.003-55.663-423.552 6.811 (0.0013) (3.51) (154.757) (4.54) 5/1 ARM * Loan Age>60-1.623-155.668 322.019 10.698 (0.003) (4.04) (99.164) (7.48) 5/1 ARM * Loan Age>60-0.247-9.954-251.808-73.436 * FICO<M (0.004) (5.56) (126.936) (25.59) Number of loans 286,990 286,990 286,990 286,990 Adjusted R-squared 0.890 0.217 0.012 0.011 Mortgage Payments: Similar rate decline across two groups At 2 year horizon this adverse effect on below median credit score on new auto financing weakens 54

Impact Heterogeneity: By Credit Score Two Year Horizon Current Current Current Interest Rate Payment FICO 5/1 ARM -0.039-22.768-4.248 (0.0009) (2.29) (0.126) Loan Age > 60 0.003-55.663-7.934 (0.0013) (3.51) (0.30) 5/1 ARM * Loan Age>60-1.623-155.668 0.728 (0.003) (4.04) (0.36) 5/1 ARM * Loan Age>60-0.247-9.954 6.854 * FICO<M (0.004) (5.56) (0.773) Number of loans 286,990 286,990 286,990 Adjusted R-squared 0.890 0.217 0.567 55

Treatment Effect of Reduction in Mortgage Payments on Debt Deleveraging 56

ZIP Code ARM Share & Change in Mortgage Rate (IV 1 st Stage) ARM Share -0.0209 (0.0002) (1) (2) (3) -0.0201 (0.0002) -0.0198 (0.0003) Zip Code Controls No Yes Yes State FE No No Yes Number of Zip Codes 8084 7488 7488 R-Squared 0.571 0.711 0.728 57

Change in Delinquency, House Price & Auto Sales Growth on ZIP Code Change in Mortgage Rate (IV 2nd Stage) Mortgage Delinquency Growth House Price Growth Auto Sales Growth (1) (3) (4) (6) (7) (9) Mortgage Rate Change 28.93 18.08-0.39-0.79-2.70-1.26 (0.82) (1.31) (0.07) (0.10) (0.15) (0.27) Zip Code Controls No Yes No Yes No Yes State FE No Yes No Yes No Yes Number of Zip Codes 8082 7487 8000 7487 8084 7488 Adjusted R-squared 0.091 0.341 0.05 0.429 0.020 0.185 58

Summary Statistics (Month 48) Full Sample 5/1 ARMs 7/1 ARMs Mean S.D. Mean S.D. Mean S.D. Original Rate 5.05 0.71 5.02 0.75 5.12 0.60 Current Rate 5.05 0.71 5.02 0.75 5.12 0.60 Margin 2.48 0.31 2.48 0.32 2.48 0.28 Current Mortgage Payment 1,013 441.89 1,012 444.79 1,014 434.95 Number of Student Loans 0.42 0.80 0.41 0.80 0.42 0.81 Number of Recent Credit Inquiries 1.86 2.05 2.00 2.08 1.76 1.98 Revolving Debt 12,426 19,149 12,642 19,427 11,901 18,483 Delinquent Revolving Debt 0.036 0.21 0.04 0.22 0.03 0.20 Revolving Utilization 24.26 26.25 24.99 26.74 22.55 24.97 Auto Debt 9,147 14,262 9,223 14,361 8,995 14,026 Origination FICO 725.76 53.86 724.42 53.96 728.95 53.51 Current FICO 727.07 78.09 724.40 79.52 733.38 74.21 Origination Combined LTV 74.00 17.75 74.15 17.93 73.64 17.31 Mortgage Delinquency Rate 0.02 0.18 0.026 0.025 0.015 0.15 Number of Loans 348,259 244,765 103,494 59

Summary Statistics (Month 60) Full Sample 5/1 ARMs 7/1 ARMs Mean S.D. Mean S.D. Mean S.D. Original Rate 5.04 0.72 5.02 0.76 5.10 0.60 Current Rate 5.04 0.72 5.02 0.76 5.10 0.60 Margin 2.48 0.31 2.48 0.32 2.49 0.28 Current Mortgage Payment 1,010 443 1,010 447 1,008 434 Number of Student Loans 0.41 0.81 0.41 0.81 0.42 0.82 Number of Recent Credit Inquiries 1.85 2.02 1.90 2.06 1.74 1.92 Revolving Debt 12,846 18,430 13,040 18,819 12,413 17,536 Delinquent Revolving Debt 0.05 0.18 0.05 0.18 0.04 0.16 Revolving Utilization 25.40 78.13 26.46 92.75 23.09 25.17 Auto Debt 8,463 21,144 8,465 21,922 8,459 19,361 Origination FICO 725.00 54.39 723.28 54.54 728.78 53.85 Current FICO 725.25 77.24 721.74 78.89 732.91 72.91 Origination Combined LTV 73.89 17.81 74.13 17.97 73.34 17.45 Mortgage Delinquency Rate 0.04 0.20 0.04 0.00 0.03 0.17 60

Geographic Distribution of ZIP Codes 61

Geographic Distribution of ZIP Codes 62

Summary Statistics High Exposure Zip Codes Low Exposure Zip Codes Mean (S.D.) Mean (S.D.) FICO 714.8 (23.2) 716.0 (18.9) LTV 64.5 (7.29) 68.1 (7.00) Interest Rate 6.64 (0.57) 6.68 (0.48) Mortgage Delinquency Rate 2.81 (3.09) 2.23 (1.83) Unemployment Rate 6.04 (1.55) 5.91 (1.47) Median Income 58.42 (14.13) 52.77 (14.38) Percentage with College Degree 31.4 (10.1) 29.5 (9.42) Percentage Married with Children 21.9 (5.13) 21.6 (5.13) Consumer Credit Score 3.37 (0.41) 3.35 (0.35) ARM Share 35.2 (7.62) 17.3 (4.51) Range in zip code ARM share: 5.8% to 63% 63

FICO Score: High & Low Exposure ZIP Codes 750 740 730 720 710 700 Control Treatment 690 680 670 660 650 2006q2 2006q3 2006q4 2007q1 2007q2 64

Mortgage Rate: High & Low Exposure ZIP Codes 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 Control Treatment 5.0 4.5 4.0 3.5 3.0 2006q2 2006q3 2006q4 2007q1 2007q2 65

Interest Rate Indices 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Six Month LIBOR 1yr Treasury 66 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 2011q3 2011q4 2012q1 2012q2 2012q3 2012q4