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