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Working Paper Series

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Working papers disseminate economic research relevant not only to the tasks and functions of the Bank of Lithuania and of the European System of Central Banks but also appealing more broadly to the academic community in economics and finance. They present, discuss and analyse the results of original and academically rigorous theoretical and/or empirical research. Working papers constitute the basis for publications in leading academic journals, making contributions to the existing literature in the fields of economics and finance. They encourage collaboration between the researchers of the Bank of Lithuania and other central banks, Lithuanian and foreign universities and research institutes.

Papers are only available in English.

No 78

Bowling Alone, Buying Alone: The Decline of Co-Borrowers in the US Mortgage Market

  • Abstract

    Using the universe of mortgage applications data and detailed credit performance data, we document that since the early 1990s there was a significant decline in the share of mortgages with co-borrowers. Although the decline was an almost universal phenomenon across different regions of the US, the rate of the decline showed significant spatial heterogeneity and in turn had implications for regional differences in economic activity. We show that the presence of a co-borrower reduces the mortgage default probability by more than 50 percent for both prime and subprime loans and those regions that had a lower co-borrower share prior to the crisis experienced higher mortgage default rates over the period 2007-2010. Higher default rates created spillovers on economic activity during the Great Recession: a lower co-borrower share at the regional level was also related to persistently lower house price growth, refinancing growth and mortgage credit growth. These results imply that the decrease in the share of mortgages with co-borrowers made the US mortgage market more vulnerable to the financial crisis and contributed to the divergence in economic outcomes across different regions.

    JEL Codes: G21, G51, R21. 

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 69

Mortgage foreclosure risk after the Great Recession

  • Abstract

    The objective of increased regulation of mortgage origination activities after the Great Recession was to prevent another foreclosure crisis in the future. However, the literature is not conclusive about the actual effect of these policy changes. By using the 2007-09 panel and subsequent waves of the Survey of Consumer Finances (SCF), we predict foreclosure risk based on individual borrower characteristics. We show that the median mortgage foreclosure probability kept decreasing after 2010, but in 2016 it was still higher relative to the year 2007. The median foreclosure probability has remained high among both non-bank borrowers and bank borrowers. The regulatory changes started in 2010, so we also compare predicted foreclosure probabilities to the levels in 2010 and find that, despite the fact that banks were affected by this regulation more than non-banks, predicted foreclosure probabilities for bank mortgages declined slower than for non-bank mortgages. Our findings offer support for a thorough analysis of the regulatory effects because they might have been weaker than expected or worked in an unexpected way.

    JEL Codes: C53, G21, G23.

    The views expressed are those of the author(s) and do not necessarily represent those of the Bank of Lithuania.

No 16

Selection of short-term fixed interest rate mortgages in an emerging market: The case of Lithuania

  • Abstract

    In this paper, we analyze how borrower characteristics influence the choice between the short-term fixed-rate mortgage (STFRM) and the long-term fixed-rate mortgage (LTFRM) types in an emerging market. We use the national Survey of Households with Housing Loans conducted by the Bank of Lithuania between 2009 and 2012. This paper is the first to empirically test the findings of Campbell and Cocco in an emerging market. Following the model of Campbell and Cocco (2003), our analysis focuses on the interaction of demand and supply. We focus on the contract outcome; we do not specify who initiated such outcome – the household or the mortgage provider. We supplement the findings of previous literature by testing the model among financially constrained households in a different economic and institutional setting; that is, in Lithuania.
    We define financial constraints of a household in multiple ways: high mortgage payment-toincome ratio, low residual income, high loan-to-value ratio, absence of savings, existence of other obligations, a single breadwinner in the household, and the existence of dependants in the household. Estimates based on these measures indicate that constrained households are more likely to choose a safer, but more expensive, long-term interest rate mortgage. Our results are in line with Campbell and Cocco’s (2003) suggestion that, when borrowing constraints are binding, financially constrained households should choose a long-term interest rate mortgage. Our results contradict the empirical evidence of Coulibaly and Li (2009), of Damen and Buyst (2013), of Ehrmann and Ziegelmeyer (2013), and of Hullgren and Söderberg (2013) that financially constrained households prefer short-term interest rate mortgages. We argue that the difference arises because of institutional features.
    Our study adds to existing literature by showing that, in the world where borrowing constraints are binding, financially constrained households have the safer mortgage type that reduces consumption shock and liquidity risks.