Tomasz Piskorski

Bio: Tomasz Piskorski is an academic researcher from Columbia University. The author has contributed to research in topics: Interest rate & Debt. The author has an hindex of 29, co-authored 66 publications receiving 3204 citations. Previous affiliations of Tomasz Piskorski include Katholieke Universiteit Leuven & New York University.

Interest Rate Pass-Through: Mortgage Rates, Household Consumption, and Voluntary Deleveraging

Abstract: Exploiting variation in the timing of resets of adjustable-rate mortgages (ARMs), we find that a sizable decline in mortgage payments (up to 50 percent) induces a significant increase in c...

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from RMBS Market

Abstract: We contend that buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion non-agency market. We construct two measures of misrepresentation of asset quality - misreported occupancy status of borrower and misreported second liens - by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.

Optimal Mortgage Design

Abstract: This paper studies optimal mortgage design in a continuous time setting with volatile and privately observable income, costly foreclosure, and a stochastic market interest rate. We show that the features of the optimal mortgage are consistent with an option adjustable-rate mortgage (option ARM). Under the optimal contract, the borrower is given discretion of how much to repay until his balance reaches a certain limit. The default rates and interest rate payment on the mortgage correlate positively with the market interest rate. Gains from using the optimal contract relative to simpler mortgages are the biggest for those who face more income variability, buy pricey houses given their income level or make little or no downpayment. Our model thus may help to explain a high concentration of option ARMs among riskier borrowers.

Forecasting Output and Inflation: The Role of Asset Prices

Abstract: This paper examines old and new evidence on the predictive performance of asset prices for inflation and real output growth. We first review the large literature on this topic, focusing on the past dozen years. We then undertake an empirical analysis of quarterly data on up to 38 candidate indicators (mainly asset prices) for seven OECD countries for a span of up to 41 years (1959 1999). The conclusions from the literature review and the empirical analysis are the same. Some asset prices predict either inflation or output growth in some countries in some periods. Which series predicts what, when and where is, however, itself difficult to predict: good forecasting performance by an indicator in one period seems to be unrelated to whether it is a useful predictor in a later period. Intriguingly, forecasts produced by combining these unstable individual forecasts appear to improve reliably upon univariate benchmarks.

House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis

Abstract: Using individual-level data on homeowner debt and defaults from 1997 to 2008, we show that borrowing against the increase in home equity by existing homeowners is responsible for a significant fraction of both the rise in U.S. household leverage from 2002 to 2006 and the increase in defaults from 2006 to 2008. Employing land topology-based housing supply elasticity as an instrument for house price growth, we estimate that the average homeowner extracts 25 cents for every dollar increase in home equity. Home equity-based borrowing is stronger for younger households, households with low credit scores, and households with high initial credit card utilization rates. Money extracted from increased home equity is not used to purchase new real estate or pay down high credit card balances, which suggests that borrowed funds may be used for real outlays. Lower credit quality households living in high house price appreciation areas experience a relative decline in default rates from 2002 to 2006 as they borrow heavily against their home equity, but experience very high default rates from 2006 to 2008. Our conservative estimates suggest that home equity-based borrowing added $1.25 trillion in household debt, and accounts for at least 39% of new defaults from 2006 to 2008.

Forecasting Output and Inflation: The Role of Asset Prices

Abstract: Because asset prices are forward-looking, they constitute a class of potentially useful predictors of inflation and output growth.

Forced Sales and House Prices

Abstract: This paper uses data on house transactions in the state of Massachusetts over the last 20 years to show that houses sold after foreclosure, or close in time to the death or bankruptcy of at least one seller, are sold at lower prices than other houses. Foreclosure discounts are particularly large on average at 28% of the value of a house. The pattern of death-related discounts suggests that they may result from poor home maintenance by older sellers, while foreclosure discounts appear to be related to the threat of vandalism in low-priced neighborhoods. After aggregating to the zipcode level and controlling for regional price trends, the prices of forced sales are mean-reverting, while the prices of unforced sales are close to a random walk. At the zipcode level, this suggests that unforced sales take place at approximately efficient prices, while forced-sales prices reflect time-varying illiquidity in neighborhood housing markets. At a more local level, however, we find that foreclosures that take place within a quarter of a mile, and particularly within a tenth of a mile, of a house lower the price at which it is sold. Our preferred estimate of this effect is that a foreclosure at a distance of 0.05 miles lowers the price of a house by about 1%.

House Prices, Home Equity-Based Borrowing, and the U.S. Household Leverage Crisis

Abstract: US household leverage sharply increased in the years preceding the 2007 eco nomic recession. The top panel of Figure 1 shows the steady rise in household debt since 1975, which accelerated beginning in 2002. In just five years, the household sector doubled its debt balance. In comparison, the contemporaneous increase in corporate debt was modest. The middle panel shows that the increase in household debt from 2002 to 2007 translated into a striking rise in household leverage as mea sured by the debt-to-income ratio. During the same time period, corporate leverage declined. The dramatic absolute and relative rise in US household leverage from 2002 to 2007 is unprecedented compared to the last 25 years. One reason for the rapid expansion in household leverage during this period is that mortgage credit became more easily available to new home buyers (Mian and Sufi 2009). Strong house price appreciation from 2002 to 2006, however, which may have been fueled by the availability of mortgage credit to a riskier set of new home buyers, could also have had an important feedback effect on household lever age through existing homeowners. Given that 65 percent of US households already owned their primary residence before the acceleration in house prices, the feedback from house prices to borrowing may be an important source of the rapid rise in household leverage that preceded the economic downturn. Our central goals in this study are to estimate how homeowner borrowing responded to the increase in house prices and to identify which homeowners responded most aggressively. We examine this home equity-based borrowing channel using a dataset consisting of anonymous individual credit files of a national consumer credit bureau agency. We follow a random sample of over 74,000 US homeowners (who owned their homes as of 1997) at an annual frequency from the end of 1997 until the end of 2008. The bottom panel of Figure 1 plots the growth in debt of 1997 homeowners over time and shows that existing homeowners borrow significantly more debt as their house prices appreciate from 2002 to 2006. While the aggregate trend is suggestive