Essays in Household Finance

This dissertation consists of three essays on household finance. In the first essay, I analyze the impact of changes to collateral value on borrowers' default decision on auto loans using two types of natural experiments in Sri Lanka. Changes in vehicle import tax rates and loan-to-value ratio caps on auto loans generated plausibly exogenous variation in the resale value of vehicles already pledged as collateral. Using proprietary auto loan performance data, I estimate that a 10% drop in the collateral value corresponds to a 44% increase in the default rate. I also find that collateral value is more important for borrowers with higher outstanding loan balances. In the second essay, we use a unique feature of California’s property tax system to empirically identify the effect of selling homeowners’ past property tax payments on their choice of listing price. Although past property taxes are sunk costs, we find that they have a significant positive effect on the sellers’ choice of listing price, which is inconsistent with rational models of decision making. This effect is stronger when sellers expect to sell at a loss relative to their purchase price, for high-valued properties, and in zip codes with lower housing transaction volumes. Interestingly, the sunk-cost effect is also stronger for sellers with higher mortgage debt, especially when they expect to incur a loss on the sale. The effect of property taxes on listing price is mostly transmitted to the selling price, which is consistent with the idea that buyers use listing prices as anchors to assess property values. Overall, our results suggest that sunk costs affect prices in the housing market. In the third essay, we show that modest differences in the interest rate at loan origination can have long-lasting effects on mortgagors. We use monthly fluctuations in the national mortgage rate at loan origination to study small changes in interest rates across home purchases made in the same year, in the same area, and which eventually reach similar levels of negative equity. A 50bp higher national rate at origination corresponds to an extra $550 in payments per year and, during the bust, an increase in defaults of 68-88 bp within 12 months of reaching negative equity. The effect is large relative average default rates of 3.78% (5.39%) for homes with 10% (30%) negative equity. Consistent with liquidity constraints, the magnitude of the effect is relatively constant across different levels of negative equity. The national mortgage rate is not correlated with worse borrower credit quality. During the boom, smaller mortgage payments result in increased consumption of non-durables and services from 2001-2007, while total expenditure is unchanged. If intermediaries resist large concessions to borrowers, small concessions may be more effective.