The Effect of Debt on Default and Consumption: Evidence from Housing Policy in the Great Recession

Pascal Noel, JCHS Meyer Dissertation Fellow, Ph.D. Candidate, Economics

During the Great Recession, depressed house prices, record foreclosure rates, and reduced aggregate demand sparked vigorous policy disputes about the best ways to decrease defaults and increase borrowers’ spending on other goods and services. Many economists have argued that failing to address debt levels by permanently forgiving mortgage principal was one of the biggest policy mistakes made during the Great Recession. Others have contended that this assertion overstates the importance of long-term debt burdens on people whose primary concerns were short-term liquidity problems.  In this talk, Noel will discuss research (conducted with Peter Ganong) that examined these issues using de-identified bank account and credit bureau records from participants in the U.S. government’s Home Affordable Modification Program, which included programs that used both approaches.  The data, Noel and Ganong found, suggest that policies that lowered current mortgage payments were more effective than principal reductions at stemming foreclosures and increasing demand.

This talk is part of the Center’s ongoing Housing Research Seminar Series, which gives faculty, senior researchers, and graduate students the opportunity to present and discuss current and recent work with a mix of scholars and practitioners.

Watch the livestream video here.