Working Paper: NBER ID: w21007
Authors: Erik Hurst; Benjamin J. Keys; Amit Seru; Joseph S. Vavra
Abstract: Regional shocks are an important feature of the U.S. economy. Households' ability to self-insure against these shocks depends on how they affect local interest rates. In the United States, most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSEs). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates that vary with local risk. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions.
Keywords: Mortgage Market; Regional Redistribution; Government Sponsored Enterprises
JEL Codes: E02; G21; G28
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of risk-adjusted pricing (G19) | Significant regional redistribution of resources (R11) |
| Private market mortgage rates respond to local default risk (G21) | Establishing a clear contrast with GSE rates (E43) |
| Political constraints on GSEs prevent them from adjusting rates based on local economic conditions (R38) | Implicit transfers from low-default to high-default regions (F16) |
| GSE mortgage rates do not vary with predictable default risk across regions (G21) | Borrowers in high-risk regions face subsidized borrowing costs compared to those in low-risk areas (G21) |