Working Paper: NBER ID: w22985
Authors: Christopher L. Foote; Lara Loewenstein; Paul S. Willen
Abstract: The reallocation of mortgage debt to low-income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom. We show that such a reallocation never occurred, as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly. Moreover, because mortgage debt varies positively with income in the cross section, equal percentage increases in debt among high- and low-income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms. Previous research stressing the importance of low-income borrowing was based on the inflow of new mortgage originations alone, so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time. And while defaults on subprime mortgages played an important part in the financial crisis, the data show that subprime lending did not cause a reallocation of debt toward the poor. Rather, subprime lending prevented a reallocation of debt toward the wealthy.
Keywords: Mortgage Debt; Housing Boom; Income Distribution; Subprime Lending
JEL Codes: D12; D14; E03; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stable distribution of mortgage debt (G21) | income levels (J31) |
| increase in mortgage debt (G21) | low-income households (R20) |
| increase in mortgage debt (G21) | high-income households (R20) |
| subprime lending (G21) | reallocation of debt towards low-income borrowers (G51) |
| subprime lending (G21) | reallocation of debt towards wealthy borrowers (G51) |
| conditional relationship between debt and income (F34) | time (C41) |