Upload
others
View
9
Download
0
Embed Size (px)
Citation preview
Phasing out the GSEs
Vadim Elenev1 Tim Landvoigt2 Stijn Van Nieuwerburgh3
1NYU Stern
2UT Austin
3NYU Stern, NBER, and CEPR
April 25, 2015
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 1 / 26
Motivation
Large government footprint in mortgage finance. GSE MBS accountfor
I 60% of stock of mortgage debtI 80% of originations in last 5 years
GSEs provide mortgage default insurance at fixed price
I How does their presence affect mortgage and housing markets?I How does it affect the financial sector?
Interaction of GSEs with banking system
I Bailout guarantees / deposit insuranceI Ability of government to provide cushion in crises
Welfare consequences of phase-out: “crowding in” the private sector
I Opinions differ for effect on mortgage stability, house prices, etc.(Mortgage Bankers Association vs Congressional Budget Office)
I Consensus around reform building (Johnson-Crapo bill)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 2 / 26
Motivation
Large government footprint in mortgage finance. GSE MBS accountfor
I 60% of stock of mortgage debtI 80% of originations in last 5 years
GSEs provide mortgage default insurance at fixed priceI How does their presence affect mortgage and housing markets?I How does it affect the financial sector?
Interaction of GSEs with banking system
I Bailout guarantees / deposit insuranceI Ability of government to provide cushion in crises
Welfare consequences of phase-out: “crowding in” the private sector
I Opinions differ for effect on mortgage stability, house prices, etc.(Mortgage Bankers Association vs Congressional Budget Office)
I Consensus around reform building (Johnson-Crapo bill)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 2 / 26
Motivation
Large government footprint in mortgage finance. GSE MBS accountfor
I 60% of stock of mortgage debtI 80% of originations in last 5 years
GSEs provide mortgage default insurance at fixed priceI How does their presence affect mortgage and housing markets?I How does it affect the financial sector?
Interaction of GSEs with banking systemI Bailout guarantees / deposit insuranceI Ability of government to provide cushion in crises
Welfare consequences of phase-out: “crowding in” the private sector
I Opinions differ for effect on mortgage stability, house prices, etc.(Mortgage Bankers Association vs Congressional Budget Office)
I Consensus around reform building (Johnson-Crapo bill)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 2 / 26
Motivation
Large government footprint in mortgage finance. GSE MBS accountfor
I 60% of stock of mortgage debtI 80% of originations in last 5 years
GSEs provide mortgage default insurance at fixed priceI How does their presence affect mortgage and housing markets?I How does it affect the financial sector?
Interaction of GSEs with banking systemI Bailout guarantees / deposit insuranceI Ability of government to provide cushion in crises
Welfare consequences of phase-out: “crowding in” the private sectorI Opinions differ for effect on mortgage stability, house prices, etc.
(Mortgage Bankers Association vs Congressional Budget Office)I Consensus around reform building (Johnson-Crapo bill)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 2 / 26
Model Overview
Houses
(Collateral)
Home
Equity
Mortgages
Equity
Deposits
Own Funds
Borrowers
Risk Takers
Depositors
Gov. Debt
Government
Mortgages
Guarantees Deposits
Gov. Debt
NPV of
Tax
Revenues
Bailouts
Guarantees
Households
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 3 / 26
Preview of Findings1. Effect of guarantees
I Cheap fixed-price guarantees distort mortgage pricing ...F 16 % more mortgage debtF 9% higher house pricesF 2.2 pp higher foreclosure rate
I ... and increase financial fragilityF Risk takers have 10% higher leverageF More frequent financial crises
I Feedback: guarantees ⇒ more bank leverage & mortgage debt⇒ more foreclosures ⇒ more guarantees
2. Welfare and Risk SharingI Aggregate welfare gain of 5% from phase outI Depositors > Risk takers > BorrowersI Negative impact of guarantees due to
F less efficient allocation of riskF foreclosure-induced DWL
3. Interaction of asset and liability guarantees: deposit insuranceamplifies effect of guarantees
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 4 / 26
Preview of Findings1. Effect of guarantees
I Cheap fixed-price guarantees distort mortgage pricing ...F 16 % more mortgage debtF 9% higher house pricesF 2.2 pp higher foreclosure rate
I ... and increase financial fragilityF Risk takers have 10% higher leverageF More frequent financial crises
I Feedback: guarantees ⇒ more bank leverage & mortgage debt⇒ more foreclosures ⇒ more guarantees
2. Welfare and Risk SharingI Aggregate welfare gain of 5% from phase outI Depositors > Risk takers > BorrowersI Negative impact of guarantees due to
F less efficient allocation of riskF foreclosure-induced DWL
3. Interaction of asset and liability guarantees: deposit insuranceamplifies effect of guarantees
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 4 / 26
Preview of Findings1. Effect of guarantees
I Cheap fixed-price guarantees distort mortgage pricing ...F 16 % more mortgage debtF 9% higher house pricesF 2.2 pp higher foreclosure rate
I ... and increase financial fragilityF Risk takers have 10% higher leverageF More frequent financial crises
I Feedback: guarantees ⇒ more bank leverage & mortgage debt⇒ more foreclosures ⇒ more guarantees
2. Welfare and Risk SharingI Aggregate welfare gain of 5% from phase outI Depositors > Risk takers > BorrowersI Negative impact of guarantees due to
F less efficient allocation of riskF foreclosure-induced DWL
3. Interaction of asset and liability guarantees: deposit insuranceamplifies effect of guarantees
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 4 / 26
Related Literature
Quantitative models on causes and consequencesof the housing boom:
I Kiyotaki, Michaelides & Nikolov 2011,Favilukis, Ludvigson & Van Nieuwerburgh 2013,Landvoigt, Piazzesi & Schneider 2015, Chu 2014
I Corbae & Quintin 2014, Garriga & Schlagenhauf 2009,Chetterjee & Eyigungor 2009, Jeske, Kruger, & Mittman 2013,Landvoigt 2013, Arslan, Guler, & Taskin 2013, Hedlund 2014
Financial intermediaries and crises:Brunnermeier & Sannikov 2012, He & Krishnamurthy 2013,Garleanu & Pedersen 2011, Adrian & Boyarchenko 2012Drechsler, Savov, & Schnabl 2014
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 5 / 26
Households and Goods
Households are three types, j = B,D,R:borrowers, depositors and risk-takers
2 goods: housing consumption, nonhousing consumption (numeraire)
Aggregate endowment of numeraire consumption,grows with stochastic trend
Housing tree pays housing services as dividends
Households have preferences over both goodsI Consumption bundle: Cobb-Douglas aggregatorI Epstein-Zin over consumption bundle
with intertemporal elasticity of one, risk aversion σj , discount factor βj
Households get share of income,initial endowment K j of shares in housing tree
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 6 / 26
Borrowers
Large family of households who chooseconsumption, houses, mortgage debt, opt. default threshold
Mortgages are (i) long-term
I Bonds with payment stream (1, δ, δ2, . . .)I Face value of debt at beginning of period
debtt−1 =α
1− δ×# of bonds ≡ F × AB
t−1
(ii) defaultable,
I Each period, borrower i receives idiosyncratic house valuation shock ωi
I Value of house after shock ωiptKBt−1
I Borrowers optimally choose owners of houses who default ⇒threshold ω∗t s.t. default for all ωi < ω∗t
I Lenders seize foreclosed houses, debt secured by houses is erased
and (iii) prepayable
I Option to prepay amount RBt of outstanding debt
at face value F for convex cost Ψ(RBt /A
Bt−1)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 7 / 26
Borrowers
Large family of households who chooseconsumption, houses, mortgage debt, opt. default threshold
Mortgages are (i) long-termI Bonds with payment stream (1, δ, δ2, . . .)I Face value of debt at beginning of period
debtt−1 =α
1− δ×# of bonds ≡ F × AB
t−1
(ii) defaultable,
I Each period, borrower i receives idiosyncratic house valuation shock ωi
I Value of house after shock ωiptKBt−1
I Borrowers optimally choose owners of houses who default ⇒threshold ω∗t s.t. default for all ωi < ω∗t
I Lenders seize foreclosed houses, debt secured by houses is erased
and (iii) prepayable
I Option to prepay amount RBt of outstanding debt
at face value F for convex cost Ψ(RBt /A
Bt−1)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 7 / 26
Borrowers
Large family of households who chooseconsumption, houses, mortgage debt, opt. default threshold
Mortgages are (i) long-termI Bonds with payment stream (1, δ, δ2, . . .)I Face value of debt at beginning of period
debtt−1 =α
1− δ×# of bonds ≡ F × AB
t−1
(ii) defaultable,I Each period, borrower i receives idiosyncratic house valuation shock ωi
I Value of house after shock ωiptKBt−1
I Borrowers optimally choose owners of houses who default ⇒threshold ω∗t s.t. default for all ωi < ω∗t
I Lenders seize foreclosed houses, debt secured by houses is erased
and (iii) prepayable
I Option to prepay amount RBt of outstanding debt
at face value F for convex cost Ψ(RBt /A
Bt−1)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 7 / 26
Borrowers
Large family of households who chooseconsumption, houses, mortgage debt, opt. default threshold
Mortgages are (i) long-termI Bonds with payment stream (1, δ, δ2, . . .)I Face value of debt at beginning of period
debtt−1 =α
1− δ×# of bonds ≡ F × AB
t−1
(ii) defaultable,I Each period, borrower i receives idiosyncratic house valuation shock ωi
I Value of house after shock ωiptKBt−1
I Borrowers optimally choose owners of houses who default ⇒threshold ω∗t s.t. default for all ωi < ω∗t
I Lenders seize foreclosed houses, debt secured by houses is erased
and (iii) prepayableI Option to prepay amount RB
t of outstanding debtat face value F for convex cost Ψ(RB
t /ABt−1)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 7 / 26
Borrowers (contd.)
Housing shock distribution G (ω) with E(ωi ) = µω = 1−depreciationI Default rate ZA(ω∗t ) = G (ω∗t )I 1− Recovery rate of lender = ZK (ω∗t ) =
∫ω>ω∗
tω dG (ω)
Variance σ2ω,t determines aggregate credit risk of borrower debt
ABt = δ(1− ZA(ω∗t ))AB
t−1 − RBt + new borrowing
Budget constraint
(1− τ)Y + qmABt + ZK (ω∗) pKB
t−1 =
C + (1− Z (ω∗))(1− δ)qmABt−1 + FRB
t + Ψ(RBt
ABt−1
) + pKBt
Borrowing constraint: F ABt ≤ φpKB
t
Complete Problem
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 8 / 26
Risk Takers
Risk takers are households that arise as intermediaries betweenborrowers and depositors
Timing of risk taker decisions
1. Bankruptcy choice2. Consumption and portfolio choice
Risk taker bankruptcyI leads to liquidation of assets and liabilitiesI and RTs incur (stochastic) utility penaltyI Government covers shortfall if assets − liabilities < 0
Effectively limited liability and deposit insurance
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 9 / 26
Risk Takers (contd.)Portfolio choice of
I private mortgage bond ARP with payoff MP and price qm
MP = 1− Z (ω∗) +(1− ζ)(µω − ZK (ω∗))pKB
AB
I guaranteed bond ARG with payoff MG and price qm + γ
MG = 1 + δZ (ω∗)F
I Risk free one-period bond BR with price q
No short-sales for both mortgage bonds and leverage constraint
−BR ≤ qm(ξPAP + ξGAG )
Beginning-of-period risk taker wealth
W Rt =[MP,t + δ(1− Z (ω∗t ))− ZR
t (qmt − F )]ARP,t−1
+ [MG ,t + δ(1− Z (ω∗t ))− ZRt (qmt − F )]AR
G ,t−1
+ BRt−1
Complete Problem
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 10 / 26
Depositors and Government
Depositors are very risk averseand only invest in risk free bonds, BD
Government follows passive tax and spending ruleI Revenues
Tt = τBt Y Bt + τSt (Y R
t + Y Dt )− τmt ZA(ω∗t )AB
t + γARt,G
I Expenditures
Gt = (MG ,t −MP,t)ARG ,t − I{R bankruptcy},tW
Rt + GT
t
I Budget constraintBGt−1 + Gt = qtB
Gt + Tt
I Transversality condition to ensure BG stays bounded
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 11 / 26
Competitive Equilibrium
Given realizations {Yt , σω,t}, sequence of choices
{CBt ,K
Bt ,A
Bt ,R
Bt , ω
∗t } for borrower households
{Dt ,CRt ,A
RP,t ,A
RG ,t ,B
Rt } for risk-taker households
{CDt ,B
Dt } for depositor households
and prices {qmt , qt , pt} such that all agents optimize and all asset marketsclear
BGt = BR
t + BDt
ABt = AR
P,t + ARG ,t
KBt = K − KD − KR
Goods market
CBt + CR
t + CDt + Housing maint. + Prepaym. cost = Yt − Forecl. losses
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 12 / 26
State Variables and Solution Method
Exogenous statesI Persistent growth rate of incomeI Mortgage credit risk σω,t
Endogenous states: wealth distribution matters for asset pricesdue to differences in preferences
I Total mortgage debt (borrower wealth)I Risk-taker wealthI Depositor wealthI Government debt
Nonlinear global solution method (policy time iteration)I Wealth distribution between risk-taker and depositor
depends on differences in risk aversionI Collateral constraints not always bindingI Bankruptcy choice
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 13 / 26
Equilibrium Characterization
Borrowers’ optimal default threshold
ω∗t =(1− τm − ψ′ + δqmt )AB
t
ptKBt−1
Risk takers’ demand for private mortgage bonds ...
qmt (1− ξPλRt ) =
Et
[MR
t,t+1
(MP,t+1 + δ(1− Z (ω∗t+1))qmt+1 − ZR
t+1(qmt+1 − F ))]
... and mortgage default insurance (guaranteed bonds)
γ = Et
[MR
t,t+1 (MG ,t+1 −MP,t+1)]
+ λRt qmt (ξG − ξP)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 14 / 26
Equilibrium Characterization
Borrowers’ optimal default threshold
ω∗t =(1− τm − ψ′ + δqmt )AB
t
ptKBt−1
Risk takers’ demand for private mortgage bonds ...
qmt (1− ξPλRt ) =
Et
[MR
t,t+1
(MP,t+1 + δ(1− Z (ω∗t+1))qmt+1 − ZR
t+1(qmt+1 − F ))]
... and mortgage default insurance (guaranteed bonds)
γ = Et
[MR
t,t+1 (MG ,t+1 −MP,t+1)]
+ λRt qmt (ξG − ξP)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 14 / 26
Equilibrium Characterization
Borrowers’ optimal default threshold
ω∗t =(1− τm − ψ′ + δqmt )AB
t
ptKBt−1
Risk takers’ demand for private mortgage bonds ...
qmt (1− ξPλRt ) =
Et
[MR
t,t+1
(MP,t+1 + δ(1− Z (ω∗t+1))qmt+1 − ZR
t+1(qmt+1 − F ))]
... and mortgage default insurance (guaranteed bonds)
γ = Et
[MR
t,t+1 (MG ,t+1 −MP,t+1)]
+ λRt qmt (ξG − ξP)
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 14 / 26
Calibration: Mortgage Risk
1. Jointly estimate mortgage duration δ and face value F = α1−δ
from Barclays MBS index using prepayment model Model
I Auxiliary pricing model to back out duration of data mortgage poolI Match geometric bond’s price-rate relationship to auxiliary model:δ = 0.95, α = 0.52
2. Two states of mortgage risk [σω,lo , σω,hi ]with transition matrix Pω
I to match average loss rates on mortgagesI and frequency and length of mortgage crises
(Jorda, Shularick, and Taylor (2014))
3. Set borrower leverage φ to match mortgage debt/income of“borrower” households in SCF
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 15 / 26
Calibration: Overview
Parameter & Description Value TargetExogenous Shocks
g mean income growth 1.9% Mean rpc GDP gr 1929-2013σg volatility income growth 3.9% Vol rpc GDP gr 1929-2013ρg persistence income growth 0.41 AC(1) rpc GDP gr 1929-2013
µω mean idiosync. house value shock 2.5% Housing depreciation CensusPopulation, Income, and Housing Shares
`i , i ∈ {B,D, R} population shares {47,51,2}% Population shares SCF 1995-2013
Y i , i ∈ {B,D, R} income shares {38,52,10}% Income shares SCF 1995-2013
K i , i ∈ {B,D, R} housing shares {39,49,12}% Housing wealth shares SCF 1995-2013Preferences
σB risk aversion borrower 8 Vol household mortgage debt to GDP 1985-2014
βB time discount factor borrower 0.88 Mean housing wealth to GDP 1985-2014
θB housing expenditure share 0.20 Housing expenditure share NIPA
σD risk aversion depositor 20 Volatility risk-free interest rate 1985-2014
βD = βR time discount factor savers 0.975 Mean risk-free interest rate 1985-2014
σR risk aversion risk taker 4 Financial sector leverage Flow of Funds 1985-2014ν intertemp. elasticity of subst. 1
Government Policy
τS = τB income tax rate 19.83% BEA govmt revenues to trend GDP 1929-2013Go exogenous govmt spending 15.8% BEA govmt spending to trend GDP 1929-2013
GT govmt transfer to HH 3.41% BEA govmt net transfers to trend GDP 1929-2013
τm mortgage interest rate deductibility 0.48 τB See textφ collateral constr 0.65% Mean borrowers’ mortgage debt-to-income SCF 1995-2013
ξG margin guaranteed MBS 1.6% Basel 2/3 regulatory capital charge agency MBSξP margin private MBS 8% Basel 2/3 regulatory capital charge non-agency mortgages
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 16 / 26
Model Simulation: Different G-fees
G-fees 20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Model Simulation: Different G-fees
G-fees
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.023 0.031 0.032 0.035Mortgage rate 0.035 0.003 0.039 0.003 0.042 0.003House price 2.121 0.138 2.041 0.100 1.934 0.100
Risk-TakerMarket value of bank assets 0.603 0.027 0.550 0.020 0.507 0.021Market value of private bonds 0.213 0.240 0.494 0.166 0.507 0.021Market value of guaranteed bonds 0.390 0.243 0.056 0.162 0.000 0.000Risk taker leverage 0.955 0.034 0.866 0.048 0.849 0.055Fraction λR > 0 0.922 0.269 0.205 0.404 0.154 0.361Bankruptcy frequency 0.186 0.389 0.002 0.039 0.000 0.014Return on RT wealth (excld. bankr.) 0.131 0.730 0.041 0.226 0.033 0.217
BorrowerMarket value of debt LTV 0.760 0.072 0.724 0.057 0.706 0.058Default rate 0.046 0.102 0.022 0.051 0.018 0.046Rate-induced prepayment rate 0.087 0.025 0.048 0.026 0.029 0.026Loss rate private 0.023 0.054 0.011 0.027 0.009 0.024Loss rate guaranteed (prepaym.) 0.006 0.012 0.002 0.004 0.001 0.003
GovernmentGovernment debt / GDP 0.195 0.179 0.051 0.059 0.021 0.005
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 17 / 26
Sources of Welfare Differences
Welfare is lower in low g-fee economy due to
less efficient allocation of riskI Effect on volatility of consumption through worse insuranceI Effect on mean of consumption through lower interest ratesI Can gauge these effects by looking at ratios of marginal utilities
(complete markets = ratios are constant)
larger deadweight losses from foreclosure: effect on mean ofconsumption
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
Aggregate Welfare 0.309 0.008 0.313 0.008 0.324 0.009Consumption borrower 0.300 0.040 0.296 0.031 0.295 0.030Consumption depositor 0.393 0.018 0.413 0.012 0.420 0.009Consumption risk taker 0.077 0.011 0.075 0.005 0.073 0.004log(MU ratio) borrower/risk taker -0.766 0.226 -0.774 0.139 -0.852 0.116log(MU ratio) risk taker/depositor 1.109 0.154 1.146 0.082 1.174 0.051
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 18 / 26
Sources of Welfare Differences
Welfare is lower in low g-fee economy due to
less efficient allocation of riskI Effect on volatility of consumption through worse insuranceI Effect on mean of consumption through lower interest ratesI Can gauge these effects by looking at ratios of marginal utilities
(complete markets = ratios are constant)
larger deadweight losses from foreclosure: effect on mean ofconsumption
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
Aggregate Welfare 0.309 0.008 0.313 0.008 0.324 0.009Consumption borrower 0.300 0.040 0.296 0.031 0.295 0.030Consumption depositor 0.393 0.018 0.413 0.012 0.420 0.009Consumption risk taker 0.077 0.011 0.075 0.005 0.073 0.004log(MU ratio) borrower/risk taker -0.766 0.226 -0.774 0.139 -0.852 0.116log(MU ratio) risk taker/depositor 1.109 0.154 1.146 0.082 1.174 0.051
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 18 / 26
Sources of Welfare Differences
Welfare is lower in low g-fee economy due to
less efficient allocation of riskI Effect on volatility of consumption through worse insuranceI Effect on mean of consumption through lower interest ratesI Can gauge these effects by looking at ratios of marginal utilities
(complete markets = ratios are constant)
larger deadweight losses from foreclosure: effect on mean ofconsumption
20 bp g-fee 25 bp g-fee 65 bp g-feemean stdev mean stdev mean stdev
Aggregate Welfare 0.309 0.008 0.313 0.008 0.324 0.009Consumption borrower 0.300 0.040 0.296 0.031 0.295 0.030Consumption depositor 0.393 0.018 0.413 0.012 0.420 0.009Consumption risk taker 0.077 0.011 0.075 0.005 0.073 0.004log(MU ratio) borrower/risk taker -0.766 0.226 -0.774 0.139 -0.852 0.116log(MU ratio) risk taker/depositor 1.109 0.154 1.146 0.082 1.174 0.051
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 18 / 26
Role of Limited Liability and Capital RequirementsBenchmark 20 bp High µρ ξG = 92%mean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.020 0.032 0.017 0.029Mortgage rate 0.035 0.003 0.039 0.003 0.038 0.003House price 2.121 0.138 2.099 0.101 2.063 0.106
Risk TakerMarket value of bank assets 0.603 0.027 0.572 0.020 0.563 0.019Market value of private bonds 0.213 0.240 0.512 0.175 0.504 0.171Market value of guaranteed bonds 0.390 0.243 0.060 0.172 0.059 0.169Risk taker leverage 0.955 0.034 0.865 0.048 0.869 0.044Fraction λR > 0 0.922 0.269 0.216 0.411 0.243 0.429Bankruptcy frequency 0.186 0.389 0.000 0.000 0.001 0.033Return on RT wealth (excld. bankr.) 0.131 0.730 0.040 0.225 0.055 0.239
BorrowerMarket value of debt LTV 0.760 0.073 0.731 0.058 0.732 0.059Default rate 0.046 0.105 0.024 0.054 0.025 0.057Loss rate private 0.023 0.054 0.012 0.028 0.013 0.030Loss rate guaranteed 0.006 0.012 0.002 0.005 0.002 0.006
GovernmentGovernment debt / GDP 0.195 0.179 0.082 0.092 0.064 0.072
WelfareAggregate Welfare 0.309 0.008 0.318 0.009 0.320 0.009
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 19 / 26
Role of Limited Liability and Capital RequirementsBenchmark 20 bp High µρ ξG = 92%mean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.020 0.032 0.017 0.029Mortgage rate 0.035 0.003 0.039 0.003 0.038 0.003House price 2.121 0.138 2.099 0.101 2.063 0.106
Risk TakerMarket value of bank assets 0.603 0.027 0.572 0.020 0.563 0.019Market value of private bonds 0.213 0.240 0.512 0.175 0.504 0.171Market value of guaranteed bonds 0.390 0.243 0.060 0.172 0.059 0.169Risk taker leverage 0.955 0.034 0.865 0.048 0.869 0.044Fraction λR > 0 0.922 0.269 0.216 0.411 0.243 0.429Bankruptcy frequency 0.186 0.389 0.000 0.000 0.001 0.033Return on RT wealth (excld. bankr.) 0.131 0.730 0.040 0.225 0.055 0.239
BorrowerMarket value of debt LTV 0.760 0.073 0.731 0.058 0.732 0.059Default rate 0.046 0.105 0.024 0.054 0.025 0.057Loss rate private 0.023 0.054 0.012 0.028 0.013 0.030Loss rate guaranteed 0.006 0.012 0.002 0.005 0.002 0.006
GovernmentGovernment debt / GDP 0.195 0.179 0.082 0.092 0.064 0.072
WelfareAggregate Welfare 0.309 0.008 0.318 0.009 0.320 0.009
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 19 / 26
Role of Limited Liability and Capital RequirementsBenchmark 20 bp High µρ ξG = 92%mean stdev mean stdev mean stdev
PricesRisk free rate -0.001 0.018 0.020 0.032 0.017 0.029Mortgage rate 0.035 0.003 0.039 0.003 0.038 0.003House price 2.121 0.138 2.099 0.101 2.063 0.106
Risk TakerMarket value of bank assets 0.603 0.027 0.572 0.020 0.563 0.019Market value of private bonds 0.213 0.240 0.512 0.175 0.504 0.171Market value of guaranteed bonds 0.390 0.243 0.060 0.172 0.059 0.169Risk taker leverage 0.955 0.034 0.865 0.048 0.869 0.044Fraction λR > 0 0.922 0.269 0.216 0.411 0.243 0.429Bankruptcy frequency 0.186 0.389 0.000 0.000 0.001 0.033Return on RT wealth (excld. bankr.) 0.131 0.730 0.040 0.225 0.055 0.239
BorrowerMarket value of debt LTV 0.760 0.073 0.731 0.058 0.732 0.059Default rate 0.046 0.105 0.024 0.054 0.025 0.057Loss rate private 0.023 0.054 0.012 0.028 0.013 0.030Loss rate guaranteed 0.006 0.012 0.002 0.005 0.002 0.006
GovernmentGovernment debt / GDP 0.195 0.179 0.082 0.092 0.064 0.072
WelfareAggregate Welfare 0.309 0.008 0.318 0.009 0.320 0.009
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 19 / 26
Dynamics During Mortgage Crisis
2 4 6 8 10-0.02
-0.01
0
0.01
0.02
0.03Risk-free Rate
2 4 6 8 100.034
0.035
0.036
0.037
0.038
0.039
0.04Mortg.Rate
2 4 6 8 101.9
1.95
2
2.05
2.1
2.15House Price
2 4 6 8 100.48
0.49
0.5
0.51
0.52
0.53
0.54
0.55Mortg.Debt
2 4 6 8 100.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9Risk-free Debt
2 4 6 8 100
0.05
0.1
0.15
0.2
0.25
0.3Gov.debt
25 bp20 bp
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 20 / 26
Dynamics During Mortgage Crisis
2 4 6 8 10-0.02
-0.01
0
0.01
0.02
0.03Risk-free Rate
2 4 6 8 100.034
0.035
0.036
0.037
0.038
0.039
0.04Mortg.Rate
2 4 6 8 101.9
1.95
2
2.05
2.1
2.15House Price
2 4 6 8 100.48
0.49
0.5
0.51
0.52
0.53
0.54
0.55Mortg.Debt
2 4 6 8 100.5
0.55
0.6
0.65
0.7
0.75
0.8
0.85
0.9Risk-free Debt
2 4 6 8 100
0.05
0.1
0.15
0.2
0.25
0.3Gov.debt
25 bp20 bp
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 20 / 26
Conclusion and Outlook
Underpriced government guarantee leads to pecuniary externalityI Intermediaries stop pricing credit risk in mortgage ratesI More debt and foreclosures
Limited liability and low capital charges of intermediaries greatlyamplify effect
Welfare higher in economy without guaranteesI Intermediaries are constrained less oftenI Better allocation among households with different risk preferences
Next stepsI Allow depositors to hold guaranteed bonds (mutual funds)I Evaluate policy proposal from Corker-WarnerI Production economy: effect of mortgage guarantees on other
productive lending opportunities in economy
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 21 / 26
Borrowers: Complete ProblemBack
V B(KBt−1,A
Bt ,SBt ) = max
{CBt ,K
Bt ,ω
∗t ,R
Bt ,B
Bt }
{(1− βB)
[(CBt
)1−θ (AKK
Bt−1
)θ]1−1/ν
+
+ βBEt
[(egt+1V B(KB
t ,ABt+1,SBt+1)
)1−σB] 1−1/ν
1−σB
1
1−1/ν
subject to
CBt = (1− τBt )Y B
t + GT ,Bt + ZK (ω∗t )ptK
Bt−1 + qmt B
Bt
− (1− τmt )ZA(ω∗t )ABt − ptK
Bt − FRB
t −Ψ(RBt ,A
Bt )
ABt+1 = e−gt+1
[δZA (ω∗t )AB
t − RBt + BB
t
]φptK
Bt ≥ F
[δZA (ω∗t )AB
t − RBt + BB
t
]0 ≤RB
t ≤ δZA (ω∗t )ABt
SBt+1 = h(SBt )
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 22 / 26
Risk Takers: Complete ProblemBack
V R(W Rt , ρt ,SRt ) = max
CRt ,A
Rt+1,P
,ARt+1,P
,BRt
(1− βR)
[(CR
t )1−θ(KRt−1)θ
eρt
]1−1/ν
+βREt
[(egt+1 V R
(W R
t+1,SRt+1
))1−σR] 1−1/ν
1−σR
1
1−1/ν
subject to:
(1− τS )Y Rt + W R
t + GT ,Rt = CR
t + (1− µω)ptKRt−1 + qmt AR
t+1,P + (qmt + γt)ARt+1,G + qft B
Rt ,
W Rt+1 = e−gt+1
[(Mt+1,P + δZA(ω∗t+1)qmt+1)AR
t+1,P + (Mt+1,G + δZA(ω∗t+1)qmt+1)ARt+1,G + BR
t
],
BRt ≥ − qmt (ξPA
Rt+1,P + ξGA
Rt+1,G ),
ARt+1,G ≥ 0,
ARt+1,P ≥ 0,
SRt+1 = h(SRt )
with continuation value
V R(W Rt ,SRt ) = max
D(ρ)Eρ[D(ρ)V R(0, ρ,SRt ) + (1− D(ρ))V R(W R
t , 0,SRt )]
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 23 / 26
G-fees Over TimeBack
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 24 / 26
Prepayment Model: Fit
1985 1990 1995 2000 2005 2010 20150
1
2
3
4
5
6Duration
Data MBS PoolModel MBS Pool
0.02 0.04 0.06 0.08 0.1 0.1275
80
85
90
95
100
105
110
115Price
Model MBS poolModel mortgage
Back
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 25 / 26
Prepayment Model: Error for Different α
0.2 0.3 0.4 0.5 0.6 0.7 0.80
0.005
0.01
0.015
0.02
0.025
0.03
0.035
0.04Absolute Errors
MeanMin RateMax Rate
0.2 0.3 0.4 0.5 0.6 0.7 0.80.86
0.88
0.9
0.92
0.94
0.96
0.98Delta
Back
Elenev, Landvoigt, Van Nieuwerburgh Phasing out the GSEs April 25, 2015 26 / 26