Liquidity versus Wealth in Household Debt Obligations: Evidence from Housing Policy in the Great Recession

By P. Ganong, P. Noel. The American Economic Review, 2020

116 citations recorded by the source corpus.

We exploit variation in mortgage modifications to disentangle the impact of reducing long-term obligations with no change in short-term payments (“wealth”), and reducing short-term payments with no change in long-term obligations (“liquidity”). Using regression discontinuity and difference-in-differences research designs with administrative data measuring default and consumption, we find that principal reductions that increase wealth without affecting liquidity have no effect, while maturity extensions that increase only liquidity have large effects. This suggests that liquidity drives default and consumption decisions for borrowers in our sample and that distressed debt restructurings can be redesigned with substantial gains to borrowers, lenders, and taxpayers. (JEL E21, G21, G51, R38)

View Paper: https://www.semanticscholar.org/paper/55f784945ed2f0742d78a04d09ee1b7a4342cb51

Citations in the corpus

• Mortgage Design in an Equilibrium Model of the Housing Market (2018, unknown): “…durring the Great Recession such as the Home Affordable Refinance Program (HARP) (Agarwal et al. (2020)) and the Home Affordable Modification Program (HAMP) (Agarwal et al. (2017), Ganong and Noel (2020)) find that monthly payment reductions significantly reduced default and increased consumption.”