Comparing Past and Present Inflation
Marijn Bolhuis, Judd Cramer & Lawrence Summers
NBER Working Paper, June 2022
There have been important methodological changes in the Consumer Price Index (CPI) over time. These distort comparisons of inflation from different periods, which have become more prevalent as inflation has risen to 40-year highs. To better contextualize the current run-up in inflation, this paper constructs new historical series for CPI headline and core inflation that are more consistent with current practices and expenditure shares for the post-war period. Using these series, we find that current inflation levels are much closer to past inflation peaks than the official series would suggest. In particular, the rate of core CPI disinflation caused by Volcker-era policies is significantly lower when measured using today’s treatment of housing: only 5 percentage points of decline instead of 11 percentage points in the official CPI statistics. To return to 2 percent core CPI inflation today will thus require nearly the same amount of disinflation as achieved under Chairman Volcker.
A Quarter Century of Mortgage Risk
Morris Davis et al.
Review of Finance, forthcoming
This paper provides a comprehensive history of default risk for newly originated home mortgages in the United States over the past quarter century. The loan-level source data include the GSEs’ entire guarantee book. We track many loan characteristics and produce a summary measure of risk. Among our many results, we show that mortgage risk had already risen in the 1990s, planting seeds of the financial crisis well before the actual event. Our results also cast doubt on explanations of the crisis that focus on borrowers with low credit scores.
The burgeoning role of iBuyers in the housing market
Michael Seiler & Liuming Yang
Real Estate Economics, forthcoming
We examine the iBuyers’ business model and their impact on housing markets. We find that iBuyers tend to enter neighborhoods that have more easily priced and homogeneous homes, as price discovery is simpler and more consistent with their pricing algorithm in those areas. iBuyers purchase homes at lower prices than individual owner-occupiers, and this acquisition discount reflects the benefits iBuyers offer to motivated sellers rather than distressed home purchases or unobserved lower-quality housing characteristics. Last, a greater presence of iBuyers results in a higher volume of local housing transactions and encourages more home sellers to sell without listing.
Racial Disparities in the Auto Loan Market
Alexander Butler, Erik Mayer & James Weston
Review of Financial Studies, forthcoming
We document racial disparities in auto lending. Combining credit bureau records with borrower characteristics, we find that Black and Hispanic applicants’ approval rates are 1.5 percentage points lower, even after controlling for creditworthiness. In aggregate, this effect crowds out 80,000 minority loans each year. Results are stronger where racial biases are more prevalent and lending competition is lower. Minority borrowers pay 70-basis-point higher interest rates, but default less ceteris paribus, consistent with racial bias rather than statistical discrimination. A major antidiscrimination enforcement policy initiated in 2013, but halted in 2018, reduced unexplained racial differences in interest rates by 60%.
The Impact of Minority Representation at Mortgage Lenders
Scott Frame et al.
NBER Working Paper, June 2022
We study links between the labor market for loan officers and access to mortgage credit. Using novel data matching the (near) universe of mortgage applications to loan officers, we find that minorities are significantly underrepresented among loan officers. Minority borrowers are less likely to complete mortgage applications, have completed applications approved, and to ultimately take-up a loan. These disparities are significantly reduced when minority borrowers work with minority loan officers. Minority borrowers working with minority loan officers also have lower default rates. Our results suggest that minority underrepresentation among loan officers has adverse effects on minority borrowers’ access to credit.
Ethno-racial stratification in the mortgage market: The role of co-applicants
Social Science Research, forthcoming
Unequal access to homeownership is central to ethno-racial stratification. Ample research demonstrates large ethno-racial disparities that exist in access and outcomes throughout the mortgage process at both the individual and neighborhood levels. The underlying assumption in most of these studies is that the couples applying for a mortgage are ethno-racially homogenous. However, the ethno-racial stratification structure is unclear when examining interracial couples in the mortgage market. This paper draws on annual data from the Home Mortgage Disclosure Act (HMDA) from 2010 to 2017 to assess variation in ethno-racial disparities in loan outcomes associated with different ethno-racial couplings. I show that ethno-racial disparities in loan outcomes vary tremendously when factoring the ethno-racial identity of the co-applicant. Interracial couples involving a black or Latino co-applicant are more likely to experience a high-cost loan or be denied a mortgage than mono-racial white couples. The results for Asian co-applicants vary, depending on the adverse loan outcome. When comparing interracial couples to mono-racial couples, the observed lending pattern provides evidence of a tri-racial hierarchy in the mortgage market.
The Social Externalities of Bank Disclosure Regulation: Evidence from the Community Reinvestment Act
Sydney Kim, Oktay Urcan & Hayoung Yoon
University of Illinois Working Paper, March 2022
We investigate the impact of bank disclosure regulations on local business activities by exploiting the 2005 Community Reinvestment Act (CRA) reform, which exempted a group of banks from federal mandatory disclosure requirements for geographic loan distribution. We find that low and moderate income (LMI)-neighborhoods experience a significant decline in small business growth, small business employment, and wages following the disclosure reform. The negative impact on small businesses is particularly pronounced in LMI areas with a high proportion of racial minority population. Using hand-collected data, we also document that non-disclosing banks indeed reduce lending to LMI areas after the reform, consistent with our results being driven by the bank credit channel. Together, our findings suggest that the disclosure elimination causes negative externalities on marginalized communities that the CRA specifically targets to protect. Overall, our findings highlight the effectiveness of mandatory disclosures as a policy tool in incentivizing banks’ social behavior.
Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending
Allison Nicoletti & Christina Zhu
University of Pennsylvania Working Paper, February 2022
We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures (TRID) rule simplifies the disclosures provided to consumers, reducing their information processing costs and increasing lenders' compliance-related frictions. We posit that TRID-affected mortgages become less attractive to lenders as an investment opportunity. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We document evidence consistent with both a decrease in consumers' information costs and an increase in compliance-related frictions faced by lenders, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending. Additional analyses suggest positive consequences for some consumers and negative consequences for others. Our study provides a better understanding of the broader economic consequences of transparency regulation for both the regulated firms and consumers, and provides a complementary perspective to the literature examining bank-level transparency in lending markets.
Has the effect of housing wealth on household consumption been overestimated? New evidence on magnitude and allocation
Jung Hyun Choi & Linna Zhu
Regional Science and Urban Economics, forthcoming
The effect of housing wealth on household consumption is puzzling as the estimated housing wealth effect in previous literature is substantially larger than what the theory predicts. This paper reinvestigates the effect of housing wealth on households’ non-housing consumption. Using the Panel Study of Income Dynamics, this study demonstrates an overestimation in prior literature by showing that the overall housing wealth effect on consumption drops to zero once household-level fixed effects are included. The impact of financial wealth and income – which are more liquid than housing wealth – on consumption remains positive and significant. The zero housing wealth effect is time-insensitive and stays robust after addressing the attenuation bias. We also directly control for the collateral channel and find that the estimated zero housing wealth effect stays unchanged, but households do increase their non-housing consumption by extracting their home equity when home prices increase. When breaking out into different consumption categories, we only observe a slight increase in clothing consumption in response to changes in housing wealth, which is more likely to be one-time and auxiliary expenses compared to consumption such as food and transportation.
Cyberattacks and Financial Stability: Evidence from a Natural Experiment
Antonis Kotidis & Stacey Schreft
Federal Reserve Working Paper, May 2022
This paper studies the effects of a unique multi-day cyberattack on a technology service provider (TSP). Using several confidential daily datasets, we identify and quantify first- and second-round effects of the event. For banks using relevant services of the TSP, the attack impaired their ability to send payments over Fedwire, even though the Federal Reserve extended the time they had to submit payments. This impairment (first-round effect) caused other banks to receive fewer payments (second-round effect), leaving them at risk of having too few reserves to send their own payments (a potential third-round effect). These innocent-bystander banks responded differently depending on their size and reserve holdings. Those with sufficient reserves drew down their reserves. Of the others, smaller banks borrowed from the discount window, while larger banks borrowed in the federal funds market. These significant adjustments to operations and funding prevented the second-round effect from spilling over into third-round effect and broader financial instability. These findings highlight the important role for bank contingency planning, liquidity buffers, and the Federal Reserve in supporting the financial system’s recovery from a cyberattack.