How Mortgage Finance Affects the Urban Landscape

Abstract

This chapter considers the structure of mortgage finance in the U.S., and its role in shaping patterns of homeownership, the nature of the housing stock, and the organization of residential activity. We start by providing some background on the design features of mortgage contracts that distinguish them from other loans, and that have important implications for issues presented in the rest of the chapter. We then explain how mortgage finance interacts with public policy, particularly tax policy, to influence a household's decision to own or rent, and how shifts in the demand for owner-occupied housing are translated into housing prices and quantities, given the unusual nature of housing supply. We consider the distribution of mortgage credit in terms of access and price, by race, ethnicity, income, and over the lifecycle, with particular attention to the role of recent innovations such as non-prime mortgage securitization and reverse mortgages. The extent of negative equity has been unprecedented in the past decade, and we discuss its impact on strategic default, housing turnover, and housing investment. We describe spatial patterns in foreclosure and summarize the evidence for foreclosure spillovers in urban neighborhoods. Finally, we offer some thoughts on future innovations in mortgage finance. How Mortgage Finance Affects the Urban LandscapeOver 80 percent of Americans live in metropolitan areas, and housing is the dominant land use in cities. For many Americans, homeownership is an important goal, and a substantial majority of the population, including renters, believes that homeownership is a good way to improve their financial situation (Fannie Mae, 2013). For many owners, and for the great majority of renters, purchasing a home will mean obtaining a mortgage. For this reason, the availability and form of mortgages is an important determinant of the homeownership rate, which in turn affects the nature of the housing stock and the organization of residential activity within and across metropolitan areas.In this chapter, we consider the literature on mortgage finance in the U.S. and its role in shaping the urban landscape. The 2000s witnessed an enormous boom/bust cycle in the residential real estate market, followed by the sharpest contraction in the overall economy since the 1930s.These events, which are widely thought to have been driven at least in part by the mortgage market, had a pronounced spatial pattern which research is only beginning to completely understand. Our workhorse models of local demand and supply of owner-occupied housing can give us only partially satisfactory explanations for the patterns we observe in the data, and more work, both theoretical and empirical, is needed to understand why the boom/bust cycle occurred when and where it did.For example, the user cost framework that has long served as the basis for analyzing how credit conditions affect the demand for owner-occupied housing provides a good basis for understanding the direction of demand shifts during the boom, but...

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“… See Cummins and Doherty (2006) for a discussion on insurance products;Inderst and Ottaviani (2012) for financial advice; Jiang, Stanford, and Xie (2012) for bond ratings; Christoffersen, Evans, and Musto (2013) for mutual funds;Chan, Haughwout, and Tracy (2015) for mortgages; andShapiro (2015) for the health sector.2 Throughout this paper, an "agent" is an individual who assists buyers or sellers in housing transactions, an "office" or a "firm" is a broker that an agent works for, and an "agency" refers to an agent and her broker.…”