Working Papers

Default Risk Heterogeneity and Borrower Selection in the Mortgage Market [SSRN]
Updated: June 2022

This paper studies limits on debt payment-to-income ratios that vary in how strictly they are applied in the mortgage market. I document that, under such flexibility, a higher debt payment-to-income ratio need not imply greater default risk. To explain this, I propose an incomplete-markets life-cycle model in which competitive lenders have discretion to relax a debt payment-to-income constraint for sufficiently creditworthy households in equilibrium. The model accounts for observed patterns of default risk heterogeneity and highlights welfare gains from regulations that use a loan’s price to proxy ability to repay instead of the debt payment-to-income ratio.

Lending by Servicing: How Shadow Banks Dampen Monetary Policy Transmission [SSRN]
with Isha Agarwal and Keling Zheng
Updated: May 2022

Despite the growing share of shadow banks in the U.S. mortgage market, the interaction between their origination and servicing business and its implications for monetary policy transmission are not well understood. We propose and test a novel channel of monetary policy transmission through shadow banks in the mortgage market, the mortgage servicing channel. We document that, during periods of monetary tightening, mortgage servicing rights (MSRs) act as a hedge and weaken the transmission of monetary policy to mortgage lending by shadow banks. Higher interest rates reduce prepayment risk, increasing the collateral value of MSRs and allowing shadow banks to receive more funding to originate mortgages. This effect is stronger for shadow banks with ex ante low liquidity and capital ratios and riskier portfolios.

Sovereign Debt Composition in Advanced Economies: A Historical Perspective [IMF WP No. 14/162, SSRN, VoxEU]
with S. M. Ali Abbas, Laura Blattner, Mark De Broeck, and Asmaa El-Ganainy
Updated: September 2014

We examine how the composition of public debt, broken down by currency, maturity, holder profile and marketability, has responded to major debt accumulation and consolidation episodes during 1900-2011. Covering thirteen advanced economies, we focus on debt structure shifts that occurred around the two World Wars and global economic downturns, and the subsequent debt consolidations. Notwithstanding data gaps, we are able to recover some broad common patterns. Episodes of large debt accumulation—essentially, large increases in debt supply—were typically absorbed by increases in short-term, foreign currency-denominated, and banking-system-held debt. However, this pattern did not hold during the debt build-ups starting in the 1980s and 1990s, which were compositionally skewed toward long-term local-currency debt. We attribute this change to higher structural demand for sovereign paper, linked to capital account liberalization in advanced economies, the emergence of a large contractual saving sector, and innovative sovereign debt products. With regard to debt consolidations, we find support for the financial repression-cum-inflation channel for post World War II debt reductions. However, the scope for a repeat of this strategy appears limited unless financial liberalization and globalization were materially rolled back or the current globally agreed monetary policy regime built around price stability abandoned. Neither are significant favorable structural demand shifts, as witnessed in the 1980s and 1990s, likely.

Works in Progress

The Selling Constraint on Shadow Bank Mortgage Lending with Isha Agarwal

The Consumption Insurance Role of Homeownership