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Monday, February 11, 2019 at 11:40am to 1:10pm
Ives Hall, 115
B07 Tower Rd, Ithaca, NY 14853, USA
Stephanie Johnson, Northwestern University
Mortgage Leverage and House Prices
Abstract: I measure the effect of mortgage leverage restrictions on house prices using a change in the eligibility requirements imposed by Fannie Mae and Freddie Mac. In 1999, Fannie Mae and Freddie Mac’s debt-to-income requirements diverged, leading to tighter lending standards in places where local lenders had pre-existing relationships with Freddie Mac. Locations with tighter debt-to-income requirements experience an immediate reduction in house prices, showing that changes in lending standards have powerful effects. The effect builds over time, resulting in a smaller house price boom and bust in these locations during the 2000s. I use a simple model to interpret the empirical results and extrapolate to other similar policies, finding that a relaxation of debt-to-income restrictions is important for explaining the 2000s housing boom.