Regional Redistribution Through the US Mortgage Market

Regional Redistribution Through the US Mortgage Market

By
Erik Hurst, Benjamin Keys, Amit Seru, Joseph Vavra
American Economic Review . October
2016, Vol. 106, Issue 10, Pages 2982-3028

Regional shocks are an important feature of the U.S. economy. Households’ ability to self-insure against these shocks depends on how they affect local interest rates. In the United States, most borrowing occurs through the mortgage market and is influenced by the presence of government-sponsored enterprises (GSEs). We establish that despite large regional variation in predictable default risk, GSE mortgage rates for otherwise identical loans do not vary spatially. In contrast, the private market does set interest rates that vary with local risk. We use a spatial model of collateralized borrowing to show that the national interest rate policy substantially affects welfare by redistributing resources across regions.