Regional Redistribution through the US Mortgage Market
Erik Hurst, Benjamin J. Keys, Amit Seru, Joseph Vavra
American Economic Review · 2016 · Volume 106 · Issue 10
Abstract
Regional shocks are an important feature of the US economy. Households' ability to self-insure against these shocks depends on how they affect local interest rates. In the United States, most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSE). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates which vary with local risk. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions.
Keywords
Business Fluctuations, Cycles, Interest Rates: Determination, Term Structure, and Effects, Banks, Depository Institutions, Micro Finance Institutions, Mortgages, Financial Institutions and Services: Government Policy and Regulation, Public Enterprises, Public-Private Enterprises, Regional Economic Activity: Growth, Development, Environmental Issues, and Changes, Housing Supply and Markets
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