Household Credit Usage: Personal Debt and Mortgages

305 Pages·2007·1.15 MB·English

by  Sumit Agarwal

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HOUSEHOLD CREDIT USAGE
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HOUSEHOLD CREDIT USAGE
PERSONAL DEBT AND MORTGAGES
Edited by
Sumit Agarwal and Brent W. Ambrose
Foreword by
John Y. Campbell
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HOUSEHOLDCREDITUSAGE
Copyright © Sumit Agarwal and Brent W. Ambrose, 2007.
All rights reserved. No part of this book may be used or reproduced in any
manner whatsoever without written permission except in the case of brief
quotations embodied in critical articles or reviews.
First published in 2007 by
PALGRAVE MACMILLAN™
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Houndmills, Basingstoke, Hampshire, England RG21 6XS
Companies and representatives throughout the world.
PALGRAVE MACMILLAN is the global academic imprint of the Palgrave
Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd.
Macmillan® is a registered trademark in the United States, United Kingdom
and other countries. Palgrave is a registered trademark in the European
Union and other countries.
ISBN-13: 978–1–4039–8392–3
ISBN-10: 1–4039–8392–5
Library of Congress Cataloging-in-Publication Data
Household credit usage : personal debt and mortgages / edited by Sumit
Agarwal and Brent W. Ambrose; foreword by John Y. Campbell.
p. cm.
Includes bibliographical references and index.
ISBN 1–4039–8392–5 (alk. paper)
1. Consumer credit. 2. Finance, Personal. I. Agarwal, Sumit. II. Ambrose,
Brent W. (Brent William), 1964–
HG3755.H68 2007
332.7(cid:2)43––dc22 2007007637
A catalogue record for this book is available from the British Library.
Design by Newgen Imaging Systems (P) Ltd., Chennai, India.
First edition: November 2007
10 9 8 7 6 5 4 3 2 1
Printed in the United States of America.
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CONTENTS
List of Charts, Figures, and Tables vii
Foreword xi
Notes on Contributors xiii
Part I Introduction
1 Household Finance and the Financial Decision-Making Process 3
Sumit Agarwal and Brent W. Ambrose
Part II Household Credit—Demand and Supply
2 Recent Developments in the Credit Card Market and the
Financial Obligations Ratio 13
Kathleen W. Johnson
3 Whither Consumer Credit Counseling 37
Robert M. Hunt
4 Consumption, Debt, and Portfolio Choice: Testing the Effects
of Bankruptcy Law 55
Andreas Lehnert and Dean Maki
Part III Household Use of Personal Credit
5 Collateral and Sorting: An Empirical Investigation of the
Market for HELOCs 79
Shubhasis Dey and Lucia Dunn
6 Asymmetric Information and the Automobile Loan Market 93
Sumit Agarwal, Brent W. Ambrose, and Souphala Chomsisengphet
7 Introductory Credit Card Offers and Balance Switching
Behavior of Cardholders 117
Tufan Ekici, Lucia Dunn, and Tae Hyung Kim
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vi CONTENTS
8 An Exploration of Usage of Personal Credit Cards by
Small Businesses 133
Grace Kim
9 Debit Cards: The New, Old Way to Pay 149
Marc Anthony Fusaro
10 Linkages between Consumer Payments and Credit 161
Sujit Chakravorti
11 Payday Lending: Evolution, Issues, and Evidence 175
Katherine A. Samolyk
Part IV Household Use of Mortgage Debt
12 Do Renters Miss the Boat? Homeownership, Renting,
and Wealth Accumulation 203
C. Tsuriel Somerville, Paulina Teller, with Michael Farrell,
Yosh Kasahara, and Li Qiang
13 Choosing between Fixed- and Adjustable-Rate Mortgages 219
Monica Paiella and Alberto Franco Pozzolo
14 Interest Rates in the Sub-Prime Mortgage Market 237
Souphala Chomsisengphet and Anthony Pennington-Cross
15 Default and Prepayment Risk in Residential Mortgage Loans:
A Review and Synthesis 253
Michael LaCour-Little
Part V Regulators Prospective of Consumer Credit
16 Statistical Analysis and Modeling for Fair Lending and
Compliance: The OCC’s Perspective 269
Mark Pocock, Irene Fang, and Jason Dietrich
Author Index 285
Subject Index 289
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LIST OF CHARTS, FIGURES,
AND TABLES
Charts
2.1 Household financial obligations ratio (FOR), 1980–2006:Q1 14
2.2 Selected components of the financial obligations ratio,
1989–2006:Q1 15
2.3 Average real credit card interest rate and the real prime rate,
1989–2006:Q1 21
2.4 Effect on the revolving credit FOR of an increasing share
of households that own credit cards, 1989–2006:Q1 25
2.5 Effect on the revolving credit FOR of a falling real
interest rate, 1989–2006:Q1 26
2.6 Effect on the revolving credit FOR of rising transactions-
related use of credit cards, 1989–2006:Q1 27
2.7 Combined effects on the revolving credit FOR of
developments in the credit card market, 1989–2006:Q1 28
2.8 Household financial obligations ratio, 1980–2006:Q1 29
Figures
3.1 Delinquent bank cardholders (1,000s) 46
3.2 Bankruptcy and debt management plans per thousand
of population aged 16+ 46
4.1 Income by debt status (absolute threshold of $3,000) 68
4.2 Income by debt status (debt/potential income) 69
4.3 Consumption and income shock distributions 70
6.1 Prepayment probability of European (EU), Japanese (JP),
and American (US) automobiles 103
6.2 Default probability of European (EU), Japanese (JP), and
American (US) automobiles 103
6.3 Prepayment probability of select automobile makes 103
6.4 Default probability of select automobile makes 104
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viii LIST OF CHARTS, FIGURES, AND TABLES
12.1 Real house prices 207
12.2 Real estimated house rents 207
14.1 Interest rates and premiums 242
14.2 Premiums by FICO 242
14.3 Premiums by LTV 243
Tables
2.1 Proportion of households with at least one credit card,
by income quintile, selected years, 1989–2004 16
2.2 Selected characteristics of households, by whether they
hold a credit card, 1989 (Percent except as noted) 18
2.3 Change in the estimated probability that a household holds
a credit card, and source of change, by income quintile,
selected years, 1989–2004 (Percent except as noted) 19
2.4 Financial and demographic characteristics of existing
and new cardholders, selected years, 1992–2004
(Percent except as noted) 20
3.1 Pros and cons of options available to borrowers 40
4.1 State-level sample means 61
4.2 Relation of U.S. quartiles 61
4.3 Joint effect of homeowner and renter exemptions 63
4.4 Selected results from the borrowing to save model 65
4.5 Sample means by debt status for the insurance model 67
4.6 (cid:3)log(c)by debt and bankruptcy exemption 70
4.7 Test for Olney effects 72
5.1 A Household’s decision to carry HELOC debt 87
5.2 HELOC debtor’s choice of loan-to-value ratio 88
5.3 HELOC non-debtor’s choice of loan-to-value ratio 88
5.4 A Bank’s choice of HELOC interest rate 89
6.1 Descriptive statistics—means and standard deviations 98
6.2 Auto loans by outcome 99
6.3 Competing Risks Models 105
7.1 Characteristics of the cardholder sample by
ascending risk type 120
7.2 Variable definitions and sample means 122
7.3 Comparisons of means by different groups 123
7.4 Coefficients from probit estimation of column (1):
intro-rate cardholding decision and column (2): balance
switching conditional on having an intro-rate card 125
7.5 Coefficients for probit sample selection model 126
8.1 Summary mean statistics for credit card usage by small businesses 137
8.2 Summary mean statistics for independent variables 140
8.3 Regression results for women-owned businesses and
for men-owned businesses 141
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LIST OF CHARTS, FIGURES, AND TABLES ix
11.1 Payday store outlets by state 183
11.2 Age profile of store performance data for monoline
payday loan stores (annual store data from two monoline
payday lending firms for 2002–2004) 191
12.1 Descriptive statistics 208
12.2 Comparing renter and owner wealth, renters invest in TSE 209
12.3 Ratio of renter to owner wealth: effect of present value
of future rent 210
12.4 Wealth accumulation determinants of the ratio of renter
to owner wealth 211
12.5 Effect of delaying purchase by one year (renters invest in the TSE) 213
12.6 Effect of delaying purchase (probability renters gain less
than owners) 214
13.1 Sample composition 222
13.2 Summary statistics: Household characteristics 223
13.3 Summary statistics: Mortgage loan characteristics 224
13.4 Probability of holding a mortgage 227
13.5 Probability of choosing an ARM 231
13.6 Characteristics of ARMs and FRMs—matching model 233
14.1 Top ten originators 238
14.2 Underwriting and loan grades 240
14.3 Mean characteristics by loan grade 241
14.4 Interest rate and spread results 245
14.5 Multinomial logit LTV results 247
14.6 Simulated interest rate and simulated spread results 248
14.7 Summary of simulated interest rate and simulated
spread fixed effects 249
16.1 Statistically significant denial rate disparities by Hispanic
ethnicity and non-Hispanic race 274
16.2 Statistically significant rate spread reporting disparities
by Hispanic ethnicity and non-Hispanic race 275
16.3 Statistically significant rate spread average disparities
by Hispanic ethnicity and non-Hispanic race 276