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Working Paper
Life-Cycle Portfolio Choices and Heterogeneous Stock Market Expectations
Survey measurements of households’ expectations about U.S. equity returns show substantial heterogeneity and large departures from the historical distribution of actual returns. The average household perceives a lower probability of positive returns and a greater probability of extreme returns than history has exhibited. I build a life-cycle model of saving and portfolio choices that incorporates beliefs estimated to match these survey measurements of expectations. This modification enables the model to greatly reduce a tension in the literature in which models that have aimed to match ...
Working Paper
Who Pays For Your Rewards? Redistribution in the Credit Card Market
We study credit card rewards as an ideal laboratory to quantify redistribution between consumers in retail financial markets. Comparing cards with and without rewards, we find that, regardless of income, sophisticated individuals profit from reward credit cards at the expense of naive consumers. To probe the underlying mechanisms, we exploit bank-initiated account limit increases at the card level and show that reward cards induce more spending, leaving naive consumers with higher unpaid balances. Naive consumers also follow a sub-optimal balance-matching heuristic when repaying their credit ...
Working Paper
Decomposing Gender Differences in Bankcard Credit Limits
In this paper, we examine if there are gender differences in total bankcard limits by utilizing a data set that links mortgage applicant information with individual-level credit bureau data from 2006 - 2016. We document that after controlling for credit score, income, and demographic characteristics, male borrowers on average have higher total bankcard limits than female borrowers. Using a standard Kitagawa-Oaxaca-Blinder decomposition, we find that 87 percent of the gap is explained by differences in the effect of observed characteristics between male and female borrowers, while ...
Working Paper
Climate Risk, Insurance Premiums and the Effects on Mortgage and Credit Outcomes
As climate change exacerbates natural disasters, homeowners’ insurance premiums are rising dramatically. We examine the impact of premium increases on borrowers’ mortgage and credit outcomes using new data on home insurance policies for 6.7 million borrowers. We find that higher premiums increase the probability of mortgage delinquency, as well as prepayment (driven mainly by relocation). The results hold using a novel instrumental variable. The delinquency effect is greater for borrowers with higher debt-to-income ratios. Both delinquency and prepayment effects are present in both GSE ...
Working Paper
Not Cashing In on Cashing Out: An Analysis of Low Cash-Out Refinance Rates
Lowering a borrower’s interest rate is one of the most effective ways to reduce a borrower’s debt burden. Mortgage refinancing offers a chance to shift debt balances from high-interest loans into a low-interest mortgage through “cashing out” some of the home’s equity. Borrowers could reduce their monthly payments by up to 13 percent by folding a student loan with a 6 percent interest rate into a mortgage with a 3 percent interest rate. Using anonymized data on mortgage refinancing behavior, we find that over half of borrowers with high-interest loans and available home equity do not ...
Working Paper
Paying Too Much? Price Dispersion in the U.S. Mortgage Market
We document wide dispersion in the mortgage rates that households pay on identical loans, and show that borrowers' financial sophistication is an important determinant of the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that borrowers with the same characteristics obtain for identical loans, in the same market, on the same day, of 54 basis points|equivalent to about $6,500 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer. ...
Working Paper
One Month Longer, One Month Later? Prepayments in the Auto Loan Market
We document a secular trend of increasing auto loan maturity from 30 months to over 70 months during the past 50 years, partly reflecting improved vehicle durability. Analyzing over half of the auto loans originated during the past 16 years, we find that longer-maturity new car loans have significantly higher interest rates with a yield curve much steeper than comparable-maturity Treasury securities. In addition, we show that the majority of auto loans were prepaid, including loans of zero-interest, and that many prepaying borrowers could have paid less interest by choosing loans of a shorter ...
Report
Financial Education and Household Financial Decisions During the Pandemic
We examine the impact of financial education on credit decisions during COVID-19. The pandemic presented economic challenges, but policy responses provided opportunities for savvy borrowers. Using variation in state-mandated financial education during high school, we find that mandated borrowers reduced revolving credit card balances by larger amounts after stimulus checks were distributed and were more likely to buy homes and refinance mortgages during times of low interest rates. Paused student loan borrowers bound by mandates originated more auto loans and mortgages while reducing growth ...
Working Paper
Decomposing Gender Differences in Bankcard Credit Limits
Using linked mortgage application and credit bureau data, we document the existence of unconditional and conditional gender gaps in the distribution of total bankcard limits. We estimate that male borrowers have approximately $1,300 higher total bankcard limits than female borrowers. This gap is primarily driven by a large gender gap in the right tail of the limit distribution. At the median and in the left tail of the total limit distribution, women have larger limits than men. Results from a Kitagawa-Oaxaca-Blinder decomposition show that 87 percent of the gap is explained by differences in ...