Larry Cordell, Karen E. Dynan, Andreas Lehnert, Nellie Liang, and Eileen Mauskopf. 11/2009. “
Designing Loan Modifications to Address the Mortgage Crisis and the Making Home Affordable Program.” Uniform Commercial Code Law Journal, 42.
AbstractDelinquencies on residential mortgages and home foreclosures have risen dramatically in the past couple of years. The mortgage losses triggered a broad-based financial crisis and severe recession, which, in turn, exacerbated the initial financial distress faced by homeowners. Although servicers increased their loss mitigation efforts as defaults began to mount, foreclosures continued to occur in cases where both the borrower and investor would be better off if such an outcome were avoided. The U.S. government has engaged in a number of initiatives to reduce such foreclosures. This paper examines the economic underpinnings of the Administration’s loan modification program, the Home Affordable Modification Program (HAMP). We argue that HAMP should help many borrowers avoid foreclosure, as its key features—a standardized protocol, incentive fees for servicers, and a requirement that the first lien mortgage payment be reduced to 31 percent of gross income—alleviate some of the previous obstacles to successful modifications. That said, HAMP is not well-suited to address payment problems associated with job loss because the required modification in such cases would often be too costly to qualify for the program. In addition, the focus of the program on reducing the payments associated with the mortgage rather than the principal of the mortgage may limit its effectiveness when the homeowner’s equity is sufficiently negative. In this case, recent government efforts to establish a protocol for short sales should be a useful tool in avoiding costly foreclosure.
PDF Karen E. Dynan, Wendy Edelberg, and Michael G. Palumbo. 5/2009. “
The Effects of Population Aging on the Relationship among Aggregate Consumption, Saving and Income.” American Economic Review, 99, 2, Pp. 380-86.
Publisher's VersionAbstractAs is well known, the US population has grown much older and is expected to continue to age. The share of adults age 65 or older—16 percent in 1980—has been rising steadily and is projected by the US Census Bureau to reach 22 percent by 2020. Given differences in saving rates and marginal propensities to consume (mpc’s) over the life cycle, demographic shifts could materially affect the relationship among macroeconomic aggregates such as income, consumption, and saving. A key question is how large these effects might be. Some past studies have used time series data to try to quantify these effects (for example, see Alan S. Blinder 1975), but demographics change more gradually than other determinants of aggregate spending, making it difficult to obtain precise estimates of the effects from such data. Our paper contributes to the literature by drawing lessons on how population aging might change the relationship between macroeconomic aggregates from household-level data. Household-level data enhance our ability to identify the effects because of the rich variation in consumption, saving, and income that we observe across households.
Karen Dynan. 2009. “
Changing Household Financial Opportunities and Economic Security.” Journal of Economic Perspectives, 23, 4, Pp. 49-68.
Publisher's VersionAbstractHouseholds have experienced an expansion of financial opportunities over the past several decades. Expanded financial opportunities, such as the democratization of credit and new lending approaches, can yield benefits in terms of household economic security. However, the financial crisis that began in 2007 has powerfully illustrated that expanded financial opportunities can also pose dangers for households. By increasing the scope for investment in risky assets, people may end up with larger swings in wealth than they had anticipated. Households may borrow too much and then face obligations that are unsustainable given their resources. To explore these issues, I examine household data on wealth, assets, and liabilities going back 25 years and, in some cases, 45 years. I argue that changes in household finances in the decades leading up to the mid-1990s -- including the gradual rise in indebtedness -- likely increased household well-being, on balance, and contributed to a decline in aggregate economic volatility. However, changes in finances since the mid-1990s -- in particular, a much sharper rate of increase in household debt -- appear to have been destabilizing for many individual households and ultimately for the economy as a whole. I consider how the lessons learned in the current crisis might change household financial opportunities and choices going forward.
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