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Saturday, May 18, 2013

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Home > Consumer Credit & Payments

Program in Consumer Credit & Payments

Coordinated by the Payment Cards Center

About the Program in Consumer Credit and Payments

The program in Consumer Credit and Payments is a Bank-wide effort to advance our understanding of these markets and to make this information available to industry, consumers, policymakers, researchers, and the public at large. On these pages you will find research and analysis produced by the Bank's subject matter experts in Community Development Studies and Education, the Payment Cards Center, Research, Supervision and Regulation, and other areas.

What's new

April 2013

Research Department Working Paper Released: The Cost of Delay
(666 KB, 29 pages)

In this study, the authors make use of a massive database of mortgage defaults to estimate REO liquidation timelines and time-related costs resulting from the recent post-crisis interventions in the mortgage market and the freezing of foreclosures due to "robo-signing" revelations. The cost of delay, estimated by comparing today's time-related costs to those before the start of the financial crisis, is eight percentage points, with enormous variation among states. While costs are estimated to be four percentage points higher in statutory foreclosure states, they are estimated to be 13 percentage points higher in judicial foreclosure states and 19 percentage points higher in the highest-cost state, New York. They discuss the policy implications of these extraordinary increases in time-related costs, including recent actions by the GSEs to raise their guarantee fees 15-30 basis points in five high-cost judicial states. Combined with evidence that foreclosure delays do not improve outcomes for borrowers and that increased delays can have large negative externalities in neighborhoods, the weight of the evidence is that current foreclosure practices merit the urgent attention of policymakers.

Visiting Scholar Working Paper Released: Modeling the Credit Card Revolution: The Role of Debt Collection and Informal Bankruptcy
(566 KB, 50 pages)

In the data, most consumer defaults on unsecured credit are informal and the lending industry devotes significant resources to debt collection. The authors develop a new theory of credit card lending that takes these two features into account. The two key elements of their model are moral hazard and costly state verification that relies on the use of information technology. They show that the model gives rise to a novel channel through which IT progress can affect outcomes in the credit markets, and argue that this channel can be critical to understand the trends associated with the rapid expansion of credit card borrowing in the 1980s and over the 1990s. Independently, the mechanism of the model helps reconcile high levels of defaults and indebtedness observed in the US data.

December 2012

Research Department Working Paper Released: Does Junior Inherit? Refinancing and the Blocking Power of Second Mortgages
(540 KB, 34 pages)

Refinancing a first mortgage puts legal principles in conflict when other, junior, liens also exist. On one hand, the principle that seniority follows time priority leaves the new refinancing mortgage junior to mortgages that were junior to the original, refinanced first mortgage. On the other hand, the principle of equitable subrogation gives the refinancing mortgage the seniority of the claim it paid down. States resolve this tension differently, thus differentiating how much a second mortgage impedes refinancing of the first. The authors exploit this cross-state variation to identify the impact on mortgage refinancing and find that refinancing is significantly more likely in the states following the principle of equitable subrogation when the homeowner also has a second mortgage.

Research Department Working Paper Released: Durable Financial Regulation: Monitoring Financial Instruments as a Counterpart to Regulating Financial Institutions
(225 KB, 23 pages)

Refinancing a first mortgage puts legal principles in conflict when other, junior, liens also exist. On one hand, the principle that seniority follows time priority leaves the new refinancing mortgage junior to mortgages that were junior to the original, refinanced first mortgage. On the other hand, the principle of equitable subrogation gives the refinancing mortgage the seniority of the claim it paid down. States resolve this tension differently, thus differentiating how much a second mortgage impedes refinancing of the first. The authors exploit this cross-state variation to identify the impact on mortgage refinancing and find that refinancing is significantly more likely in the states following the principle of equitable subrogation when the homeowner also has a second mortgage.

• Last update: May 7, 2013