Consequences of Mortgage Finance
Atif Mian
University of California, Berkeley
U.S. HH Debt to GDP: 1916-today
Source: Credit Suisse
U.S. HH Debt to GDP: 1916-today

Is it just a coincidence?


Why should HH debt matter for the aggregate economy?


Perhaps we have been unlucky a couple of times
For every borrower, there is a lender
…. however

more evidence to suggest it is more than a coincidence
OECD HH debt and recessions
Source: Glick and Lansing (2010)
OECD HH debt and recessions

Also …
Mervyn King (1994)

Comparison of high and low HH leverage counties within
the U.S. tightens the connection between HH leverage
and GDP.
High and Low HH debt within the U.S.

Durable consumption
Source: Mian and Sufi (2011)
High and Low HH debt within the U.S.

Local employment
Source: Mian and Sufi (2011)
What can be done about HH debt?

Monitor / Regulate HH leverage?




But who decides what level is appropriate?
Who announces “the party is over”?
Past experience not very promising (U.S., Europe, Japan)
Better to see the problem as one primarily of efficient risk
sharing.



We may not know when households have over-borrowed
But we can design mortgage contracts such that if a systemic
shock were to occur, risk (losses) will be distributed between
borrowers and lenders more evenly.
e.g. linking mortgage principal write downs (ex-ante) to
aggregate (or regional) house price indices.
Example: mortgage design matters
Effect of foreclosures on
house prices
.3

Fiserv CSW house price growth
0
-.1
Forced sales lower prices for
everyone, pulling down aggregate
demand and investment further.
-.2
0
.05

.1
Same result holds for
investment and durable
consumption as well.
.1
.15

Natural Log Scale with 2004Q1 Subtracted
.2
.2
.25
Zillow house price growth
2004q1
2005q3
2007q1
2008q3
No judicial requirement
Source: Mian, Sufi and Trebbi
(2011)
2010q1
Judicial requirement
2004q1
2005q3
2007q1
No judicial requirement
2008q3
2010q1
Judicial requirement