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we're here today with Wharton real
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estate professor Ben keys to talk about
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some of his latest research Ben thanks
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for being here thanks for having me
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first of all could you give us basically
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a brief overview of your research what
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were you trying to find out yeah so a
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lot of my recent research has focused on
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trying to understand the role of
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monetary policy and how that transmits
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to households through the mortgage
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market so traditionally we've thought of
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the ways to stimulate the economy as
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being either through the fiscal side so
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through a tax rebate or through the
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monetary policy lowering of interest
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rates but the challenge is figuring out
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how those lower interest rates actually
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hit consumers pocketbooks and so in this
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project we're looking at the mortgage
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market as the key channel through which
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lower interest rates affect households
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and when interest rates were lowered in
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response to the Great Recession we were
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able to study this in much more detail
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this is natural experiment exactly so we
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had a time period unusually low interest
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rates and so that lowers the cost of
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borrowing for households who are not yet
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borrowing but in particular it benefits
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mortgage holders who can either
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refinance if they have a fixed rate
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mortgage or in the case of an adjustable
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rate mortgage on a mortgage that's
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indexed to the Treasury rate their
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interest rate falls automatically and
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their payments fall automatically and so
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one of the ways that we tried to study
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the pass-through of interest rates to
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households was looking at these
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automatic resets of adjustable rate
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mortgages the way that we tried to
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tackle this question was focus on two
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different types of adjustable rate
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mortgage borrowers borrowers that had a
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long fixed period and borrowers that had
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a short fixed period so one group would
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be exposed to lower interest rates
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sooner rather than later what we found
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was that the group of borrowers who were
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exposed sooner had interest rate
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reductions of about 175 basis points
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which if you translate that into dollars
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most people can't translate basis points
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into dollars in their head for the
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average loan it reduced their mortgage
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payments by about fifteen hundred
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dollars in the first year and thirty
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four hundred dollars over the first two
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years so let's compare that to a
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traditional tax rebate you might get a
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one-time check for five hundred dollars
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the
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was a much larger effect and something
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that benefited them throughout the life
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of the loan what we wanted to see was
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what was the impact of this reduction
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and we were able to take advantage of
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some amazing data that links mortgages
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to credit records so we could track the
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this reduction in payments through not
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just mortgage payments but also to the
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rest of the credit portfolio and what we
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found was that mortgage defaults fell
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thirty-six percent for this group who
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received this reduction in payments this
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monetary policy stimulus so a very large
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reduction in in default rates and that's
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not especially surprising if you lower
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people's mortgages their mortgage
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payments they're going to be more likely
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to make those payments what we thought
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was more interesting and more novel was
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the fact that we could track where those
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that reduction in payments was landing
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through the rest of their portfolio so
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we were able to see a reduction in
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credit card payments and credit card
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debt that they were about twenty percent
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of that reduction was going towards
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paying down credit cards and that was
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especially a large factor for those
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consumers who had a lot of credit card
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debt to begin with so they're taking
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this reduction in in mortgage payments
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and transferring that money to their
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highest cost debt so we sort of see the
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rebalancing of the household portfolio
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but we also see as households going out
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and spending that money in the form of
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buying new cars and so consumers who
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receive this reduction in mortgage
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payments relative to the group who were
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going to receive the reduction later
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they spent about ten percent of that
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quote-unquote monetary policy stimulus
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on new car purchases so are there other
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key takeaways that you found well one of
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the things that that we wanted to
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highlight in this study was the benefits
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of automatic transmission of monetary
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policy through adjustable rate mortgage
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contracts again the borrower doesn't
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have to do anything it just they get a
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letter in the mail that says
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congratulations your payment has fallen
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of course we're coming to a time period
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where interest rates might rise and
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they'll get the opposite letter sorry
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your payment's going to go up but that's
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a really strong stark contrast to the
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fixed rate case where you have to
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actively refinance your mortgage you
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have to pay attention to what the
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current rates are you
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need to reach out to a lender to be
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reevaluated and re underwritten for that
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loan many people who were underwater on
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their mortgage couldn't qualify for
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refinancing so there's a really nice
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benefit to adjustable rate mortgages
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through this automatic transmission of
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monetary policy which I think was
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underappreciated so I could see how this
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could have a lot of implications in
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particular for policy makers I mean what
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do you think are some of the practical
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takeaways from this well I think one of
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the challenges for policymakers going
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forward is to rethink the predominant
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mortgage contract which is the fixed 30
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fixed-rate 30-year mortgage that's a
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contract that's been very popular
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popularized by Fannie Mae and Freddie
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Mac sort of in response to some
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short-term contracts coming out of the
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Great Depression and those contracts are
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really nice for borrowers in certain
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ways and really challenging for other
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types of borrowers so on the good side
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it's a fixed payment every month for 30
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years you know exactly how much you're
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going to owe every month for 30 years
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and that type of stability allows you to
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make very long-term plans and it's very
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easy to assess whether you're going to
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be able to make that payment or not what
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the challenge of the fixed rate contract
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is that you have to actively refinance
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that contract and you have to be
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approved for that contract so when
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credit dries up as we saw it dry up in
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the wake of the Great Recession and
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standards are tightened there's going to
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be a large group of people who are going
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to be unable to refinance and this is
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what the harp program was designed to
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counteract we wouldn't need such an
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extensive harp program if more consumers
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were on adjustable rate mortgages and so
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the monetary policy impact would pass
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directly through through this automatic
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refinancing the risk there is that
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consumers are going to be bearing that
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upside risk as well that when rates rise
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their payments are going to go up and we
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might not think that a lot of low income
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households in particular should be
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facing that kind of risk that they
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should be insulated from future interest
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rate changes so I think one of the key
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policy takeaways is that in downturns
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adjustable rate mortgages look like a
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really convenient mechanism through
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through which households can benefit
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from from policy and the challenge going
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forward is to think about what's going
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to happen on the upside and what's next
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for this research so part of the part of
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the research going forward is going to
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focus on the impacts of of rate
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increases as we begin to see those so
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this is a project where we're waiting in
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the wings for the Fed to raise rates I'm
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not going to speculate on one that's
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going to happen sure but I think that as
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we see rates rise will see these types
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of adjustable rate mortgage contracts
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become costlier for borrowers and
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they're either going to want to
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refinance out of those or we're going to
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see the impact on their pocketbooks the
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other thing we'd like to study in more
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detail is the regional impacts that
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there are parts of the country where
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adjustable rate mortgages are more
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prevalent or less prevalent and in our
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existing work we've done some analysis
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looking at the regional impacts and
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shown that the regions of the country
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that had more of these adjustable rate
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mortgages where rates fell faster and
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payments fell faster they recovered
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faster during the great regret Great
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Recession so we saw increased house
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prices we saw more auto sales and we
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actually saw increased local employment
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in those parts of the countries so we
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want to do more to study the regional
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impacts and get a better understanding
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about how a national policy like setting
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interest rates can have really divergent
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impacts across different parts of the
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country it's been think so much for
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being here thanks for having me
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you
