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Author ORCID Identifier
N/A
AccessType
Open Access Dissertation
Document Type
dissertation
Degree Name
Doctor of Philosophy (PhD)
Degree Program
Economics
Year Degree Awarded
2016
Month Degree Awarded
September
First Advisor
Robert Pollin
Second Advisor
Michael Ash
Third Advisor
Arindrajit Dube
Fourth Advisor
Gerald Epstein
Subject Categories
Econometrics | Economics | Finance | Macroeconomics | Political Economy
Abstract
This dissertation consists of three essays which analyze the role of household debt in the financial crisis of 2007-2009, and weak recovery that followed. In these essays, I pursue the following research topics: 1) Estimation of the effects of mortgage fraud on losses to foreclosure, 2) Estimation of whether loan modifications increased or decreased debt, and 3) Analyzing the historical evolution of housing finance regulation to advance a proposal for reform. While formally independent, these essays share a common theoretical perspective located at the intersection of financial macroeconomics and political economy. These essays analyze how conflicts of interest and inside information in the structure of private mortgage securitization generated perverse incentives that increased financial fragility. These problems caused large losses to foreclosure for borrowers, investors, and the communities in which the foreclosures were located in. The first essay describes how mortgage fraud by the financial services industry concentrated risk and leverage on the borrowers least able to bear it. The industry then deceived investors who bought securities based on these mortgages about the level of risk they were taking on. This essay finds that excess losses to foreclosure borne by investors due to fraud were substantial, prolonged through time, and concentrated in economically fragile communities that did not recover from the financial crisis. The second essay discusses how a conflict of interest between loan servicers and investors impeded efficient debt restructuring in loan modifications. This essay finds that instead of mitigating losses for investors by forgiving debt, servicers increased borrowers’ debt by imposing punitive fees. However, while these fees were profitable for servicers, they resulted in larger eventual losses for investors due to redefaults. The final essay locates the failures identified by the first two essays within the larger historical evolution of housing financial regulation. This essay proposes the creation of a new public option for household finance which would provide regulatory tools to prevent consumer protection abuses.
DOI
https://doi.org/10.7275/8911174.0
Recommended Citation
Herndon, Thomas, "Three Essays on U.S. Household Debt and the Sources of Systemic Financial Fragility" (2016). Doctoral Dissertations. 716.
https://doi.org/10.7275/8911174.0
https://scholarworks.umass.edu/dissertations_2/716
Included in
Econometrics Commons, Finance Commons, Macroeconomics Commons, Political Economy Commons