Pal champions financial relief for homeowners

Avantika Pal’s research shines a light on the importance of advocating for homeowners facing foreclosure. Her work demonstrates how granting them extra time can significantly improve their chances of staying afloat financially.

“My research focuses on household finance, particularly where it intersects with labor and finance,” said Pal, who joins Gies Business as assistant professor of finance. “I explore the causes of financial stress in households and how labor markets and financial regulations either exacerbate or alleviate it.”

Pal said she was drawn to Gies because of the research of Assistant Professor of Finance Julia Fonseca, whose work focuses on the intersection of household finance with labor markets, and Associate Professor of Finance Jialan Wang, whose research centers on topics related to household and consumer finance as well as fintech.

“I am excited about the prospect of getting guidance from and collaborating with these faculty members,” said Pal. “I’m also looking forward to having access to big data resources because so much of my research depends on it.”

From modeling markets to studying household stress

Pal’s fascination with finance sparked at Blackrock, where she modeled forecasts for economic indicators like unemployment and housing prices.

“I learned about the US economy and mortgage industry from colleagues who were the equivalent of PhDs in finance,” said Pal, who earned her undergraduate and master’s degrees in economics in India. “In 2012 and 2013 there was a mandate for stress testing and scenario analysis coming out of the recovery of the Great Recession of 2008, and we were watching the US economy closely, particularly with respect to the size of the mortgage industry and household debt.”

Despite lacking formal training or research experience in finance, she gravitated toward the field. This passion led her to an unexpected opportunity to become a research associate at the Indian School of Business. Her mentor there, a graduate of Washington University in St. Louis, recognized her potential and facilitated collaborations on research projects. This opportunity paved the way for her to move to the US to pursue a doctorate in finance. It was her first international trip, and she moved into her new apartment just two days before starting classes.

“Building that IKEA bed on my own taught me a lot about my strength and independence,” said Pal, whose research focuses on foreclosure, job loss, and the labor market consequences for financial misconduct.

The power of time to prevent foreclosure

Foreclosure is a devastating experience, impacting a homeowner’s ability to own property and access credit in the future. When a borrower falls behind on payments (typically 60- to 90-days delinquent) the lender or mortgage servicer can initiate foreclosure proceedings. However, policies like the ones implemented during the pandemic, which granted temporary delays, demonstrate the value of giving homeowners more time.

“My research shows that a grace period can significantly ease borrowers’ financial stress,” said Pal. “It allows them to free up funds typically used for mortgage payments and focus on finding a better-paying job. This extra time can be crucial for getting back on track and avoiding foreclosure.”

Beyond debt relief: The impact of economic shocks

A long-standing debate resurfaced during the pandemic about optimal debt relief – particularly concerning borrower incentives. There was no conclusive evidence, so she used employment and consumer data to empirically investigate the intended benefits of a large-scale debt relief policy.

Pal’s research also explores how rising consumer prices impact households. These nondiscretionary expenses can lead to defaults on credit cards. For example, someone who relies on a car for work might struggle to cut back on gas expenses, unlike those with access to public transportation or the cash reserves to quickly switch to an electric vehicle.

Another area of focus is how an employer’s size and type affect a worker’s ability to weather inflation. Employers with substantial monopsony power – a market situation in which there is only one buyer, such as large retail chains – may be less likely to offer wage increases around adverse shocks compared to smaller businesses with a more critical need for employee retention.

Financial misconduct and the revolving door

Public trust in the finance industry has eroded over time. Fraudulent behavior is prevalent despite reputational costs to a firm. Through her research, Pal discovered that those engaged in this kind of activity don’t face enough personal consequences in their careers.

“My research shows those fired from finance for misconduct don’t necessarily face significant wage reductions in their next job compared to those dismissed for non-disciplinary reasons, such as a layoff,” said Pal. “It’s counterintuitive and raises questions about the effectiveness of current penalties.”

Her findings are based on examining Equifax’s income and employment verification for mortgages and unemployment benefits. Unlike other industries, where misconduct leads to steeper wage declines, finance appears to operate differently. Pal suggests that the difficulty in proving intent in financial misconduct, where losses can be attributed to market fluctuations, could be a contributing factor.

Pal hopes her research will influence policy and regulatory practices within the finance industry to deter fraudulent activity.

“It may be more effective to shift from corporate penalties to ones imposed on individual employees at the local level who are directly responsible for misconduct,” said Pal.