Distributional Implications of Government Guarantees in Mortgage Markets

Gete, Pedro and Zecchetto, Franco (2017): Distributional Implications of Government Guarantees in Mortgage Markets. Forthcoming in: Review of Financial Studies

Abstract

We analyze the removal of the credit-risk guarantees provided by the government sponsored enterprises (GSEs) in a model with agents heterogeneous in income and house price risk. We find that wealth inequality increases, driven by higher mortgage spreads and housing rents. Housing holdings become more concentrated. Foreclosures fall. The removal benefits high-income households, while hurting low- and mid-income households (renters and highly leveraged mortgagors with conforming loans). GSE reform requires compensating transfers, sufficiently high elasticity of rental supply, or linking GSE reform with the elimination of the mortgage interest deduction.

• Item Type: MPRA Paper
• Language: English
• Keywords: Default, Loan Guarantees, Housing, Inequality, Mortgages, Rents
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; H - Public Economics > H8 - Miscellaneous Issues > H81 - Governmental Loans ; Loan Guarantees ; Credits ; Grants ; Bailouts; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R2 - Household Analysis

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