We analyze an experiment conducted by a large U.S. bank that offered consumers achoice between two credit card contracts, one with an annual fee but a lowerinterest rate and one with no annual fee but a higher interest rate. We findthat on average consumers chose the credit contract that minimized their costs.A substantial fraction of consumers (about 40%) still chose the suboptimalcontract. Nonetheless, the probability of choosing the suboptimal contractdeclines with the dollar magnitude of the potential error, and consumers withlarger errors are more likely to subsequently switch to the optimalcontract.

Given the growth in home equity lending during the 1990s, it is imperative that lenders and regulators understand the risks associated with this segment of the residential mortgage market. Using a unique panel data set of over 135,000 homeowners with second mortgages, our analysis indicates that significant differences exist in the prepayment and default probabilities of home equity loans and lines, providing insights into bank minimum capital requirements. We find that households with equity loans are relatively more sensitive to changes in interest rates. By contrast, households with equity lines are more sensitive to appreciation in property value.

This paper uses a dataset from a leading American subprime lender, which contains detailed information on borrower and loan characteristics. We find that financial professionals are less likely to become delinquent. This effect cannot be explained by borrower characteristics, such as income, education, loan terms, property characteristics, geographic effects, or strategic default. We also find variation in the effect of working in a financial profession across borrowers of different ages and income levels. We discuss explanations for these results.

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.

This study assesses a new mechanism, the deposit channel, in the transmission of interest rate shock to household consumption using an administrative panel data set of financial transactions for Turkey. Our empirical strategy exploits variation in consumers' adherence to the Islamic laws that forbid earning interest and employs a standard difference-in-difference design. Following an unanticipated announcement of interest rate hike, rate-sensitive consumers significantly reduce their overall spending, and the response persists throughout the post-announcement period. The response of debt payment, disparate exposure to inflation, exchange rate, and the demographic difference can hardly fully account for the documented consumption response heterogeneity.

What "Triggers" Mortgage Default? by Ronel Elul, Nicholas S. Souleles, Souphala Chomsisengphet, Dennis Glennon and Robert Hunt. Published in volume 100, issue 2, pages 490-94 of American Economic Review, May 2010

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

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.

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.