美聯(lián)儲-抵押貸款設(shè)計、還款計劃和家庭借款 Mortgage Design,Repayment Schedules,and Household Borrowing

FinanceandEconomicsDiscussionSeries

FederalReserveBoard,Washington,D.C.

ISSN1936-2854(Print)

ISSN2767-3898(Online)

MortgageDesign,RepaymentSchedules,andHouseholdBorrowing

ClaesB“ackman,PatrickMoran,PetervanSanten

2024-077

Pleasecitethispaperas:

B~ackman,Claes,PatrickMoran,andPetervanSanten(2024).“MortgageDesign,RepaymentSchedules,andHouseholdBorrowing,”FinanceandEconomicsDiscussionSeries2024-077.Washington:BoardofGovernorsoftheFederalReserveSystem,

/10.17016/FEDS.2024.077

.

NOTE:StafworkingpapersintheFinanceandEconomicsDiscussionSeries(FEDS)arepreliminarymaterialscirculatedtostimulatediscussionandcriticalcomment.TheanalysisandconclusionssetfortharethoseoftheauthorsanddonotindicateconcurrencebyothermembersoftheresearchstafortheBoardofGovernors.ReferencesinpublicationstotheFinanceandEconomicsDiscussionSeries(otherthanacknowledgement)shouldbeclearedwiththeauthor(s)toprotectthetentativecharacterofthesepapers.

MortgageDesign,RepaymentSchedules,andHouseholdBorrowing*

ClaesB¨ackmantPatrickMoran?PetervanSanten§

June4,2024

Abstract

Howdoesthedesignofdebtrepaymentschedulesaffecthouseholdborrowing?Toanswerthisquestion,weexploitaSwedishpolicyreformthateliminatedinterest-onlymortgagesforloan-to-valueratiosabove50%.Wedocumentsubstantialbunchingatthethreshold,leadingto5%lowerborrowing.Wealthyborrowersdrivetheresults,challengingcreditconstraintsastheprimaryexplanation.Wedevelopamodeltoevaluatethemechanismsdrivinghouseholdbehaviorandfindthatmuchoftheeffectcomesfromhouseholdsexperiencingongoingflowdisutilitytoamortizationpayments.Ourresultsindicatethatmortgagecontractswithlowinitialpaymentssubstantiallyincreasehouseholdborrowingandlifetimeinterestcosts.

JELClassification:G51,G21,E21,E6

Keywords:Mortgagedesign;Amortizationpayments;Macroprudentialpolicy;Bunching

*WethankRobAlessie,JohanAlmenberg,OlgaBalakina,VimalBalasubramaniam,EirikBrandsaas,TahaChoukhmane,TobinHanspal,StephanieJohnson(discussant),RagnarJuelsrud,KarinKinnerud,KavehMajlesi,ClemensSialm(discussant),JakobSogaard,LarsE.O.Svensson,NikodemSzumiloandseminarparticipantsattheECB,SverigesRiksbank,UniversityofGroningen,LundUniversity,NordicJuniorMacroSeminar,EFA,CentralBankofIrelandWorkshoponBorrowerFinances,theNFNYoungScholarsFinanceWebinarseries,IAAE,EEA-ESEM,theFederalReserveBoard,theFederalReserveBankofPhiladelphia,GoetheUniversity,theIMF,andASSA2024forhelpfulcomments.WegratefullyacknowledgeresearchsupportfromtheLeibnizInstituteforFinancialResearchSAFE.ClaesB¨ackmanwouldliketothankJanWallandersochTomHedeliusstiftelseforgenerousfinancialsupport.TheempiricalanalysisinthispaperwasdonewhenvanSantenworkedattheFinancialStabilityDepartmentofSverigesRiksbank.TheviewsexpressedinthispaperaresolelythoseoftheauthorsanddonotrepresenttheviewsoftheFederalReserveBoard,theFederalReserveSystem,orthe

Sve.teforFinancialResearchSAFE(

claes.backman@)

?FederalReserveBoard,CEBI,andIFS(

patrick.e.donnellymoran@)

§FacultyofEconomicsandBusiness,UniversityofGroningen(

p.c.van.santen@)

1

1Introduction

Oneofthemostimportantfeaturesofthemortgagecontractistherepaymentschedule.Mostmortgagesforcetheborrowertograduallyrepaythemortgageandbuildwealthintheformofhomeequity.Mandatorymortgagerepaymentrepresentsalargeshareofaggregatehouseholdsavings,similarinmagnitudetopensioncontributions(

Bernstein&Koudijs,

2023)

.Whilehistoricallyhouseholdshadlittlechoiceovertherepaymentschedule,financialinnovationduringrecentdecadescreatedawidevarietyofalternativemortgageproductsthatallowhouseholdstodelaymortgagerepayment(

Cocco,

2013

).Perhapsthemostfamousexampleistheinterest-onlymortgage,whichsurgedinpopularityinthemid-2000s,jumpingtoroughly25percentofmortgageoriginationsintheUnitedStatesduringtherun-upofmortgagedebtpriortothefinancialcrisis(

Amrominetal.,

2018)

.Financialregulatorsaroundtheworldcontinuetograpplewiththequestionofhowtoregulatethisimportantfeatureofthemortgagecontract.1

Despitetheimportantroleoftherepaymentschedule,wehavelittleevidenceonhowthisfeatureofthemortgagecontractaffectshouseholdborrowing.Thereareatleasttwocontrastingviews.Ononehand,interest-onlyloansrelaxcreditconstraints,helpingconstrainedhouseholdsborrowwhentheyexpectincomeorhousepricestogrow(

Piskorski&Tchistyi,

2010;

Cocco,

2013

).Ontheotherhand,manycommentatorshavesuggestedthatconsumersmaysufferfrombehavioralbiasesthatleadthemtoincreaseborrowingduetointerest-onlymortgages.Accordingtoonesuchtheory,bothconstrainedandunconstrainedconsumersmayprioritizealowmonthlypayment,whichishighlysalient,ratherthanminimizethenetpresentvalueoffutureinterestpayments(

Argyleetal.,

2020

).Whilewealreadyhaveclearevidenceontheroleofcreditconstraintsinmortgagelending,weknowlittleaboutthelattermechanism.

Tobetterunderstandhowtherepaymentscheduleaffectshouseholdborrowing,werequirequasi-experimentalvariationinrepaymentschedulesthataffectshouseholdswhoarefarfromtheircreditconstraints.Toachievethisgoal,weexploitapolicyreforminSwedenthatelimi-natedinterest-onlymortgagesforborrowerswithloan-to-value(LTV)ratiosabove50percent.Inresponsetothereform,wefindthatmanyhomebuyersmakelargerdownpayments,andexistingborrowersextractlessequity,leadingtobunchingjustbelowthe50percentLTVthreshold.Thereductioninborrowingisdrivenbyrelativelywealthyhouseholdswithsubstan-1Countrieshavetakendrasticallydifferentapproaches.WhiletheUSstronglydiscouragesinterest-onlymort-

gages,manyEuropeancountriescontinuetoallowthem.Incontrast,theUKhasrecentlybeguntoencouragebankstooffermortgageswithlongermaturitiestocounteractrisinginterestrates.

2

tialadditionalborrowingcapacity,thusrulingoutcreditconstraintsastheprimarydriverofourresults.Motivatedbytheempiricalevidence,wedevelopatheoreticalframeworktoclarifythemechanismsthatmayleadwealthy,unconstrainedhouseholdstoreduceborrowingtoavoidamortization.Wefindthatmuchoftheresponseisdrivennotbyfinancialconsiderationsbutratherbypsychiccosts.Morespecifically,wefindthathouseholdssufferongoingflowdisutilitytoamortizationpayments,whichleadsthemtochooseamortgagewithalowmonthlypayment,evenifitcomeswithhigherlifetimecosts.Identificationisdrivenbythefactthatmostofthebunchingisgeneratedwithoutamissingmass,whichalternativeversionsofthemodelwithoutflowdisutilityfailtogenerate.Ourresultsprovideevidencethathouseholdssufferfrom“NetPresentValue(NPV)neglect”inthespiritof

Shu

(2013)and

Argyleetal.

(2020)

.Asaresult,newmortgageproductswithdelayedrepaymentschedulesmaysubstantiallyincreasehouseholddebtandthelifetimecostsofinterestexpenditure.

Inourempiricalanalysis,weexploitanamortizationrequirementintroducedinSwedenin2016withtheintentofreducingmortgagedebt.Before2016,interest-onlymortgagesconsti-tutedthemajorityofmortgagecontractsinSweden.Theamortizationrequirementintroducedminimummandatorymortgagepaymentsbasedontheborrower’sloan-to-value(LTV)ratio.Morespecifically,forallmortgagesissuedafterJune2016,borrowerswithLTVratiosabove50percentarerequiredtorepayatleast1percentoftheoriginalloaneachyear,whileborrowerswithLTVratiosabove70percentarerequiredtorepayatleast2percent.MortgageswithLTVratiosbelow50percentarenotrequiredtobeamortized.Borrowerscanreduceamor-tizationpaymentsoncetheygetbelowtheLTVthresholds.Weestimatetheresponsetotherequirementusingadifference-in-bunchingestimator,usingpre-requirementyearstoformthecounterfactualLTVdistributionatorigination.WedocumentsignificantbunchingatbothLTVthresholds.NewborrowersreducetheirLTVratiosby5percentinresponsetoaonepercentagepointhigheraverageamortizationrate.

Whileitwouldbeeasytorationalizebunchingbybindingcreditconstraints,mosthouse-holdsatthepolicythresholdhavesubstantialadditionalborrowingcapacity,thuschallengingcreditconstraintsastheprimarydriverofourempiricalresults.First,borrowerscantakeoutsubstantiallylargermortgages,uptoamaximumLTVratioof85percent.Second,whileapayment-to-income(PTI)requirementmayinteractwiththeamortizationrequirement,mostbunchinghouseholdsstillhavesubstantialadditionalborrowingcapacity.Morespecifically,

3

whileroughly14percentofborrowersthatbunchatthe50percentLTVthresholdarecon-strainedbythePTIrequirement,theremaininghouseholdscouldborrowatleastanadditional$67,000(44percentofoursampleaverage)beforefacingbindingpaymentconstraints.Creditconstraintsarethusunabletoexplainourempiricalresults.

Weassessthevalidityofourempiricalapproachandtherobustnessofourresultsalongseveraldimensions.First,weconfirmthevalidityofourempiricalstrategyusingplacebotests,whichshowthatpreviousyearsindeedprovideavalidcounterfactualLTVdistribution.Second,estimatingthecounterfactualdistributionusingapolynomialapproach(

Kleven,

2016

)yieldslargerestimatesoftheimpactoftheamortizationrequirementonhouseholdborrowing.Third,wefindsimilarresultsforhouseholdsthatpurchaseapropertycomparedtothosewhorefinance,alleviatingconcernsabouthousingchoice.2Finally,weinvestigatevarioussupply-sidefactors(e.g.,mortgageapproval,collateralassessments,andrefinancingcosts)butfindthatnonecanexplainourresults.Forinstance,theinterestrateisflatovertheLTVthreshold,thusindicatingthatbunchingisnotdrivenbymortgagepricing.

Motivatedbytheempiricalevidence,wedevelopatheoreticalframeworktoclarifythemechanismsthatmayleadwealthyhouseholdstobunchbelowthepolicythresholdtoavoidamortizationpayments.Webeginwithatraditionallife-cyclemodelofconsumption,housing,andmortgagedecisionsinthespiritof

Campbell&Cocco

(2003)and

Cocco

(2005)

.Inthemodel,credit-constrainedhouseholdsborrowtopurchasehousingwhilefacedwithuninsurableidiosyncraticincomerisk.Householdsborrowusinglong-termmortgagecontractswithmanda-toryminimumpayments.Weallowfortwopolicyregimes:interest-only(IO)mortgagesandmandatoryamortizationpaymentsforhouseholdsabovethe50percentLTVthreshold.ThetwopolicyregimesbroadlyrepresenttheinstitutionalframeworkinSwedenbeforeandafterthe2016reform.

Whilethetraditionalmodeldescribedabovecouldeasilygeneratereducedborrowingforpoorhouseholdsfacingbindingcreditconstraints,itcannotgeneratebunchingbywealthyborrowersatthe50percentLTVthreshold.WeprovideintuitionforthelackofbunchingatthisthresholdbyinspectinghowexpecteddiscountedutilityvariesaccordingtotheLTVratio.Wefindthattheamortizationrequirementreducesexpectedutilityforallhouseholdsduetoreduced2Forrefinancers,thebanksetsthehomevalueexogenouslybasedontheirassessmentofthecollateralvalue.

TheseresultssupportourinterpretationthattheobserveddeclineinLTVratioscomesfromlowerloandemand(thenumeratorintheLTVratio)andnotfromchangesinhousingchoices(thedenominator).

4

flexibilitytosmoothconsumptionala

Cocco,

2013.

Thatsaid,theamortizationrequirementdoesnotcreateadiscontinuouschangeatthepolicythreshold,andthereforedoesnotresultinbunching.Thelackofbunchingbywealthyhouseholdsisrobusttoawidevarietyofalternativeassumptionsrelatedtopreferenceparameters,assetreturns,andrefinancingcosts.Indeed,evenwhenwegivehouseholdsaccesstoahigh-returnliquidasset,westilldonotfindwealthyhouseholdsbunchingatthe50percentLTVthreshold.

Ifthestandardmodeldoesnotgeneratebunchingforwealthy,unconstrainedhouseholds,whatpotentialextensionscanhelpthemodelreplicateourempiricalresults?

Kleven

(

2016

)ex-plainsthatfourmechanismsmaygeneratebunching:notchesorkinksinthebudgetconstraintornotchesorkinksinhouseholdpreferences.Asmentionedpreviously,wefindaverylimitedroleformechanismsoperatingthroughthebudgetconstraint.Wethereforeturnouratten-tiontowardshouseholdpreferences,extendingthemodelwithtwobroadclassesofbehavioralmechanismsthatmaygenerateeitheranotchorkinkinpreferences.Weadoptareduced-formapproachtobehavioralmodeling,remainingagnosticaboutthespecificbehavioralbiasesthatmaycreatethewedgeinhouseholdpreferences,following

Mullainathanetal.

(2012)

.

Thefirstmechanismisthathouseholdsmayexperienceaone-offdisutilitycostthatapplieswhenborrowersturnoffamortizationpayments.Thismechanismgeneratesanotchinhouseholdpreferences,astakingoutamortgagejustabovethe50percentLTVthresholdisdiscontinuouslyworsethantakingoutamortgagejustbelowthethreshold.Thisone-offdisutilitymayoccurifhouseholdsexperienceacosttomortgagerenegotiationwhencallingthebanktoturnoffamortizationpaymentsonceeligible.Wemodelthisasautilitycost,asmonetaryrefinancingcostsarelowinSweden.Thatsaid,variousbehavioralfactorscouldgenerateasimilarone-offcost,andourapproachneststhesepossibilities.Forinstance,ifhouseholdsareuncertainabouttheirabilitytoturnoffamortization,thiswouldcreateaone-offcost.Similarly,ifthepolicythresholdservesasatargetthatagentsstrivetoachieve,thenreferencedependencecouldalsogenerateanotchinhouseholdpreferences(

Kleven,

2016

).

Thesecondmechanismisthathouseholdsmaysufferongoingflowdisutilityfromamorti-zationpayments.Thismechanismgeneratesakinkinpreferences,astheeffectisstrongerforhouseholdsfurtherfromthe50percentLTVthreshold;assuch,householdsmustmakeamor-tizationpaymentsformoreperiods.Therearevariousrelatedmechanismsthatmaygenerateongoingflowdisutilityfromamortizationpayments.Forinstance,householdsmayperform

5

“monthlypaymenttargeting,”wheretheyfocusontargetingaspecificmonthlymortgagepay-mentratherthanminimizingthelifetimecostoftheloan,inthespiritof

Argyleetal.

(2020)

.Similarly,householdsmayviewamortizationpaymentsasacostratherthanaformofsaving,inthespiritof

Camanho&Fernandes

(2018)

.3Ineithercase,suchpreferencesimplythathouse-holdsdonotfullyconsiderthenetpresentvalue(NPV)offutureinterestcostswhenchoosingbetweenmortgagecontractswithalternativerepaymentschedules.Asaresult,householdsmaychoosecontractswithlowerinitialpaymentsandhigherlifetimecosts,evenwhentheycouldaffordtodootherwise.Werefertothisconceptas“NPVneglect”following

Shu

(2013)

.

Todisentangletherelativecontributionofthesetwoverydifferentmechanisms,weexploitthattheone-offdisutilitycostgeneratesanotchinhouseholdpreferenceswhileongoingflowdisutilitygeneratesakink.Thisdistinctionisusefulforidentification,asnotchesgeneratebunchingduetoadominatedregionwithmissingmassdirectlyabovethethreshold,whileincontrast,kinksaltertheincentivesforallhouseholdsabovethethreshold,thusgeneratingbunchingwithoutamissingmass.Inthedata,wefindthatlessthan15percentofbunchingisexplainedbymissingmassdirectlyabovethethreshold.ThelackofmissingmassisdifficulttorationalizewithoptimizingfrictionssinceborrowerscanchoosetheLTVvaluedirectlyandsincetheconsequencesofchoosingahigherLTVarehighlysalient.Weconcludethatwhilebothmechanismsplayarole,mostoftheresponseisdrivenbyhouseholdssufferingongoingflowdisutilitytoamortization,consistentwiththetheoryof“NPVneglect.”

Ourresultshaveimportantimplicationsforunderstandingthelinkbetweenfinancialinno-vationandhouseholdborrowing.InaworldwithNPVneglect,newmortgageproductswithinterest-onlypayments(orlongermaturities)havelargeaggregateeffectsonhouseholddebt.Moreover,suchproductssubstantiallyincreaselifetimeinterestexpenses.Todemonstrate,weuseourmodeltostudyoneofthekeyaspectsoffinancialinnovationinUSmortgagemarketsduringthelate1990sandearly2000s:thetransitionfromtraditional30-yearmortgagestoalternativemortgageproductswithlessstringentrepaymentschedules.Webeginwithanecon-omywherehouseholdsonlyhaveaccessto30-yearamortizingmortgages,thensuddenlyallowhouseholdstoborrowusingIOmortgages.IntroducingIOmortgagesincreasesmortgagedebtbyabout33percentinourcalibratedmodel.Thestructuralmodelallowsustodecomposethedifferentchannelsdrivingtheincreaseinborrowing.Wefindthatroughlytwo-thirdsofthe

3InSwedishsurveyevidence,38percentofrespondentsstatethatamortizationpaymentsareacost,44percentstatethatamortizationpaymentsareaformofsavings,and18percentdonotknow(

SBAB,

2018)

.

6

increasecomesfrom“NPVneglect,”whiletheremainingone-thirdcomesfromrelaxedcreditconstraints(inthespiritof

Cocco,

2013

).Thepolicychangehasasimilareffectoninterestexpenditures,whichalsoincreaseby33percentoverthelife-cycle.Inshort,wefindthat“NPVneglect”amplifiestheeffectsoffinancialinnovationonhouseholdborrowing.Thedegreeofamplificationisheightenedbythefactthatwefindakinkratherthananotchinhouseholdpreferences.Hadhouseholds’observedbehaviorbeendrivenbyanotch,therewouldhavebeenonlyalocaleffectonhouseholdborrowingand,thus,asmalleramplificationrelativetothetraditionalmodel.

Takingstock,ourfindingshaveimportantimplicationsforunderstandinghouseholdprefer-encesfordebtrepayment.Andwhilewefocusonthemortgagemarket,manyofourresultsextendtootherformsofconsumerborrowing,wherethereisasimilardebateabouthowhouse-holdsrespondtonewfinancialproductswithlongermaturitiesorlowerinitialpayments.Un-derstandingthesepreferencesiscrucialforbothconsumerprotectionagenciesconcernedaboutthewelfareeffectsofnewfinancialproducts,aswellasmacroprudentialregulatorsconcernedaboutaggregatedebtlevels.

RelatedLiterature.Weseethreemaincontributionsofthispaper.First,weprovidenovelevidencethatrepaymentschedulesaffectborrowingdecisions,evenforunconstrainedborrowers,whichhelpsimproveourunderstandingofhouseholdpreferencesfordebtrepayment.Weviewourresultsascomplementaryto

Argyleetal.

(2020),whofindthatconsumersperform“monthly

paymenttargeting”whenchoosingbetweenautoloans,eveninsubsamplesofunconstrainedborrowers.Inasimilarspirit,

Shu

(2013)providessurveyevidenceof“NPVneglect,”the

tendencyofborrowerstotargetinitialpaymentsizeinsteadofminimizingthenetpresentvalueoffutureinterestcosts.Furthersurveyevidenceby

Camanho&Fernandes

(

2018

)showsthatmanyindividualsdecidewhethertopurchasehousingbasedonthedifferencebetweenmonthlyrentalpaymentsandmonthlymortgagepayments,evenwhenthelatterincludesamortizationpayments.Relativetotheexistingliterature,wearethefirsttoevaluatethepresenceof“NPVneglect”inobservedmortgagedecisions,aswellasthefirsttoevaluatethistheoryusingquasi-experimentalevidence.

Second,wecontributetothegrowingliteratureonmortgagedesign,whichhasrecentlyshownincreasinginterestinmortgagerepaymentschedules.4

Bernstein&Koudijs

(2023)showthat

4Seealsoseminalcontributionsfrom

Cocco

(2013)and

Piskorski&Tchistyi

(2010)

.Recentpapersonthetopicalsoinclude

Vihri¨al¨a

(2023)and

Ferrari&Loseto

(2023)

.

7

amortizationpaymentscontributesubstantiallytohouseholdwealthaccumulation.

Campbell

etal.

(2020)studyamodelwhereanoptiontoloweramortizationpaymentsinarecession

helpstostabilizeconsumption.

Gurenetal.

(2021)studyanequilibriummodelwherecounter

-cyclicalpaymentreductionsreducedefaultandstimulatehousingdemand.

Attanasioetal.

(2021)evaluatetheroleofamortizationpaymentsasasavingscommitmentdevice

.

Ganong

&Noel

(2020)findthatextendingmortgagematurityhasalargeimpactondefaultrates

.

Amrominetal.

(2018)showthatinterest-onlymortgageswereusedbyprimeborrowersinthe

UShousingboom.

Garmaise

(2013)showsthatincreasedflexibilityinmortgagecontractsled

tohigherborrowing.Wealsonotethatamortizationpaymentsrepresentade-factoconstraintonsavingsandborrowingforpayment-constrainedborrowers.Amortizationpaymentshaverecentlybeenincludedinseveraltheoreticalmodelsthatincorporaterealisticfeaturesofthemortgagecontract(

Greenwald,

2017;

Kaplanetal.,

2020;

Boaretal.,

2022

),buttheinteractionwithcreditconstraintshasreceivedlessattention.Withinthisliterature,wearethefirsttoconsiderthepossibilitythathouseholdsmaysufferfrombehavioralbiaseswhenchoosingbetweenmortgagecontractswithalternativerepaymentschedules.

Third,ourresultsarerelevantforunderstandingtheroleoffinancialinnovationincontribut-ingtotheaccumulationofmortgagedebtpriortothe2008financialcrisis.Loweramortizationpaymentsinthefirstyearsafteroriginationwereacommonfeatureofinterest-onlymortgages,optionARMs,andballoonmortgagesintherun-uptotheGreatRecessionintheUnitedStates

(Amrominetal.,

2018;

Barlevy&Fisher,

2020;

Justinianoetal.,

2021)

.Similaroccurredinothercountries:Australia,Denmark,Finland,Greece,Korea,andPortugalallintroducedinterest-onlymortgagesbetween1995and2005(

Scanlonetal.,

2008

).Ourresultssuggestthattheincreasedavailabilityandsubsequentdisappearanceofnon-traditionalmortgageswithloweramortizationpaymentscanexplainlargemovementsinhouseholddebtintheUnitedStates.Lookingforward,policymakersshouldbeawarethatdebtrepaymentschedulescouldhavelargeconsequencesforcreditgrowth.Ourresults,therefore,alsocontributetothegrowingliteratureontheeffectofmacroprudentialpolicies(e.g.

Ceruttietal.,

2017;

Laufer&Tzur-Ilan,

2019;

Peydr′oetal.,

2020;

DeFuscoetal.,

2020

).

Methodologically,thepresentpaperbuildsuponagrowingliteraturethatusesbunchingtounderstandpreferences.Theuseofbunchingtoidentifypreferenceshasreceivedattentioninreviewarticlesby

Kleven

(2016)and

DellaVigna

(2018)

.Prominentexamplesinhousehold

8

financeinclude

Andersenetal.

(2022)whostudyreferencedependenceinhousingmarkets,

Choukhmane

(2021)whostudiesopt-outcostsinretirementdecisions,

Collieretal.

(2021)

whostudycollateralaversioninlendingmarkets,and

Bestetal.

(2020)whoestimatethe

intertemporalelasticityofsubstitutionusingmortgagedecisions.Otherprominentexamplesinclude

Laceteraetal.

(2012)and

Strulov-Shlain

(2023)whostudyleft-digitbiasinpricing

.Tothebestofourknowledge,wearethefirsttousebunchingtostudy“NPVneglect.”

SeveralstudiesexaminetheeffectoftheSwedishamortizationrequirement.

Andersson&

Aranki

(2017)useadifference-in-differencestrategytoshowthattheamortizationrequirement

reducedhouseholdborrowing.

Andersson&Aranki

(2019)analyzetheadditionalamortization

requirementintroducedin2018thatmandatedthatmortgageswithadebt-to-incomeratioabove4.5hadtobeamortizedbyanadditionalpercentagepoint.Theauthorsshowthathouseholdsareborrowing,onaverage,8.5percentlessthantheyotherwisewouldhavedoneandthattheyarealsobuyinglessexpensivehomes.

Wilhelmsson

(2022)findsthattheamortization

requirementledtoa7percentreductioninhouseprices.

Thepaperisorganizedasfollows.Section

2

describestheSwedishmortgagemarketandtheamortizationrequirement.Section

3

presentsthedataanddiscussestheempiricalstrategy.Section

4

providesthemainempiricalresults.Section

5

developsatheoreticalframeworktounderstandhouseholds’responsetotheamortizationrequirement.Section

6

summarizesanddiscussespotentialextensions.

2TheAmortizationRequirement

TheSwedishhousingandcreditmarketsexperiencedrapidgrowthintheearly2010s.Housepricesincreasedby31percentbetween2011and2015,andcreditgrowthincreasedfrom5percentin2012toover8percentin2015.Concernedwithfinancialandmacroeconomicsta-bility,theSwedishFinancialSupervisoryAuthority(Finansinspektionen,orFSA)announcedthattheywouldproposenewregulationinNovember2014–theamortizationrequirement–intendingtoreducedebtlevelsovertime.Thepurposewastolimitmacroeconomicrisksposedbyhighhouseholddebtlevels.TheFSAconsideredhouseholdswithhigherLTVratiosahigherrisk;consequently,regulationtargetedthisgroup.TherequirementcameontopofthecurrentrecommendationbytheSwedishBankersAssociation(SBA),whichrecommendedthatborrow-ersamortizeiftheirLTVvaluesexceeded70percent.Theamortizationrequirementwasfinally

9

Amortizationrate

(%)

2.0

1.5

1.0

2016-2018

Requirement

2014-2015

0.5

Recommendation

2011-2013

0.0

0102030405060708