Speaker: Patrick Moran (Federal Reserve Board)

Paper Title: Mortgage Design, Repayment Schedules, and Household Borrowing

Abstract: How does the design of debt repayment schedules affect household borrowing? To answer this question, we exploit a Swedish policy reform that eliminated interest-only mortgages for loan-to-value ratios above 50%. We document substantial bunching at the threshold, leading to 5% less borrowing. Wealthy borrowers drive the results, challenging credit constraints as the primary explanation. We develop a model to evaluate the mechanisms driving household behavior and find that much of the effect comes from households experiencing ongoing flow disutility to amortization payments. Our results indicate that new debt contracts with low initial payments substantially increase household borrowing and lifetime interest costs.

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