This paper provides a survey of existing literature on portfolio allocations in conventional and tax-deferred investment habitats. A long-standing puzzle in this literature has been the dissonance between the theoretical prediction of tax-efficient portfolio choices and observed portfolio allocations. I clarify this prediction and offer a different perspective by emphasizing the importance of uninsurable labor income risk and restrictions on accessibility of tax-deferred assets. I identify the key factors in dual-habitat portfolio decisions and highlight the necessary ingredients for producing non-tax-efficient, or precautionary, allocations.

In this paper, we document trends in credit use across income groups in the period surrounding the Great Recession. We investigate trends in access to different credit markets, including mortgages, home equity, automobiles, and student loans. We disentangle growth rates of new market entrants from the aggregates and analyze overall as well as within-county growth rate differentials across income strata. Our findings may provide insight into the financial well-being of different income groups in the context of the Great Recession.

Complex mortgages became a popular borrowing instrument during the bullish housing market of the early 2000s but vanished rapidly during the subsequent downturn. These non-traditional loans, including interest-only and negative-amortization mortgages, enable households to postpone loan repayment in contrast to fully amortizing traditional mortgages. Contrary to common perception, complex mortgages are used by households with high-income levels and prime credit scores, quite unlike the low-income population targeted by subprime mortgages. Nonetheless, we find that complex-mortgage borrowers become delinquent on their mortgages at rates twice as high as borrowers with plain-vanilla fixed-rate contracts even after controlling for household and loan characteristics. Our findings suggest a link between innovations in mortgage markets focused on prime borrowers and the financial crisis.

We measure the effect of a 2006 antipredatory pilot program in Chicago on mortgage default rates to test whether predatory lending was a key element in fueling the subprime crisis. Under the program, risky borrowers or risky mortgage contracts or both triggered review sessions by housing counselors who shared their findings with the state regulator. The pilot program cut market activity in half, largely through the exit of lenders specializing in risky loans and through a decline in the share of subprime borrowers. Our results suggest that predatory lending practices contributed to high mortgage default rates among subprime borrowers, raising them by about a third.

We study the effects of securitization on renegotiation of distressed residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observe lender renegotiation actions and cover more than 60% of the U.S. mortgage market. Exploiting within-servicer variation in these data, we find that bank-held loans are 26–36% more likely to be renegotiated than comparable securitized mortgages (4.2–5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have 9% lower post-modification default rates (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans. We also provide evidence supporting the affordability focus of recent policy actions, such as the Home Affordability Modification Program.

We study a specific practice of predatory lending: Borrowers being rejected and approved in rapid succession by the same lender. We show that in such cases borrower and contract characteristics and ex post performance are consistent with predatory steering. Steered borrowers are associated with groups with lower financial sophistication. They are more likely to enter non-amortizing contracts with high profit margins that are quickly securitized. Steered borrowers default less in boom years when refinancing is easy. However, their performance deteriorates sharply once falling prices trap them in contracts with rising payments, reflecting the long-term costs of predatory lending.

When borrowers are delinquent, senior debtholders prefer liquidation, whereas junior debtholders prefer to maintain their option value by delaying resolution or modifying the loan. In the mortgage market, a conflict of interest (“holdup”) arises when servicers of securitized senior liens are also the owners of the junior liens on the same property. We show that holdup servicers are able to delay action on the first-lien mortgage. When they do act, servicers are more likely to choose resolutions that maintain their option value, favoring modification and soft foreclosures over outright foreclosures. Holdup behavior is more likely to result in borrower self-curing.

Learning to Cope: Voluntary Financial Education and Loan Performance during a Housing Crisis by Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet and Douglas D. Evanoff. Published in volume 100, issue 2, pages 495-500 of American Economic Review, May 2010

The U.S. House of Representatives Financial Services Committee considered many important banking reforms in 2009 to 2010. We show that, during this period, foreclosure starts on delinquent mortgages were delayed in the districts of committee members although there was no difference in delinquency rates between committee and noncommittee districts. In these areas, banks delayed the foreclosure starts by 0.5 months (relative to the 12‐month average). The estimated cost of delay to lenders is an order of magnitude greater than the campaign contributions by the political action committees of the largest mortgage servicing banks to the committee members in that period.

We evaluate the effects of the 2009 Home Affordable Modification Program (HAMP) that provided intermediaries with sizable financial incentives to renegotiate mortgages. HAMP increased intensity of renegotiations and prevented a substantial number of foreclosures but reached just one-third of its targeted indebted households. This shortfall was in large part due to low renegotiation intensity of a few large intermediaries and was driven by intermediary-specific factors. Exploiting regional variation in the intensity of program implementation by intermediaries suggests that the program was associated with a lower rate of foreclosures, consumer debt delinquencies, house price declines, and an increase in durable spending.