Reverse Mortgages and Borrower Maintenance Risk

This paper develops a theoretical model of the problem of maintenance risk in reverse mortgages (RMs) and home equity conversion instruments generally. By maintenance risk, we refer to the incentive homeowners will have to reduce maintenance expenditures as their equity in the house falls during the term of the RM. The underlying reason for this tendency is the limited liability feature of RMs, given that a borrower's obligation to the lender at. maturity is limited to the value of the house.
The results of the model show that lenders will respond to this problem either by limiting the amount of RM loans to guarantee that maintenance risk is not a threat, or by charging an interest rate premium to cover the expected cost of default. Unfortunately, there do not exist data to test the importance of maintenance risk as a possible limitation on the extent of the RM market.     

Short-term financing in a cash-constrained supply chain

In this paper we consider a two-level supply chain with a single retailer and a manufacturer, where both the firms are facing financial constraints and can not produce/order their optimal quantity. Our work shows that a lender who finances the manufacturer has a motivation to finance the retailer as well. Motivated by this, we investigate lender's problem of financing both the firms by making a joint decision on the loan amount and comparing it with the case when lender makes independent decision on loan amount for both the firms. Our numerical study indicates that if one of the firms in the supply chain has sufficiently low cash, joint decision (we refer to it as supply chain financing) may be better not only for the lender but for the retailer and manufacturer as well.     

Inflation Risk, Payment Tilt, and the Design of Partially Indexed Affordable Mortgages

This paper integrates two fundamentally important parameters into a theory of optimal mortgage design: the proportion of inflation risk borne by the lender / investor and the borrower and the amortization-graduation schedule for loan repayments. Equations are derived for a family of innovative mortgages, termed hybrid PLAMs, which offer advantages to borrowers and lenders over either the standard fixed rate mortgage (FRM) or the price level adjusted mortgage (PLAM). The superiority of the hybrid PLAMs lies in their ability to simultaneously and independently accommodate differing degrees of inflation-risk sharing and payment affordability. Inflation-risk sharing is represented by an indexation parameter set over a continuum of values such that the FRM has zero index variability and the PLAM has unit index variability. Similarly, payment tilt is represented by a tilt parameter such that the FRM has zero tilt and the PLAM has unit tilt. We demonstrate that these two parameters are independent and can each be continuously varied in a two-dimensional family of self-amortizing mortgages. A specific hybrid PLAM can be designed to partition inflation risk in any proportion between the borrower and the lender and to simultaneously prescribe any level of payment tilt between the extremes of the FRM and PLAM. The behavior of representative hybrid PLAMs is simulated and compared to FRMs and PLAMs for three different inflation scenarios, one of which uses actual market data from the period of 1960–1990.     

Managing Mortgage Interest-Rate Risks in Forward, Futures, and Options Markets

This article reviews the Housing Commission's perspective and recommendations on management of interest-rate risks in housing finance, and considers the relative advantages of various techniques by which institutions on the supply side of mortgage markets can absorb or shift such risks. It is argued that exchange-based options can provide a more reliable way than cash forward contracting for originators or purchasers of mortgages to manage commitment-period risk, but that commitment fees charged household borrowers should not fully correspond to premiums for put options "traded" on the exchanges. It also is argued that exchange-based futures can provide a more effective and economical way than asset-liability maturity matching in cash markets for thrift institutions to manage portfolio interest-rate risks; in particular, futures trading can permit these institution to meet the maturity preferences of liquidity-conscious creditors and risk-averse borrowers, to reduce the risk associated with unexpected shifts of the yield curve, and to maintain a higher degree of asset quality. The capacity of futures markets to handle large-scale hedging by mortgage market participants will depend upon heavy participation by highly leveraged speculators who are willing to take long positions without the receipt of substantial risk premiums from hedgers.     

Self-Selection in the Fixed-Rate Mortgage Market

This paper analyzes the effect of information asymmetry between the lender and the borrower (i.e., the borrower knows how long he will reside in his home, whereas the lender does not) on the borrower's choice among the interest rate-discount points combinations available in the fixed-rate mortgage market. The analysis shows that if the rate-points trade-off of the mortgage menu is either too steep or too flat, then all types of borrowers will choose the same loan contract from the menu. In addition, if the rate-points trade-off is not convex to the origin, then only the contracts with extreme rate-points combinations will be chosen by borrowers; all contracts with intermediate rate-points combinations are redundant and will not be chosen by any borrowers. Intermediate rate-points combination mortgage contracts would be chosen by some borrowers only if the mortgage menu were to provide a self-selection function. Several necessary conditions of a self-selection mortgage menu are depicted.     

Renegotiation of Troubled Debt: The Choice between Discounted Payoff and Maturity Extension

Renegotiation of securitized debt contracts is generally a more efficient solution to default than foreclosure when there are significant deadweight costs associated with the enforcement of security rights. Recent literature shows that when renegotiation takes the form of discounted loan payoffs, it eliminates deadweight costs associated with the liquidation or transfer of assets. There is evidence, however, that, in practice, renegotiation of other contract terms such as maturity is a more common form of loan workout. This observation is puzzling because, in general, maturity renegotiation does not eliminate deadweight costs. We provide a partial answer to this puzzle by showing that maturity renegotiation better aligns the incentives of borrowers and lenders than does renegotiation of principal. Specifically, we find that borrowers who expect that lenders will renegotiate maturity in the event of default have less incentive to divert cash flow from the collateral during the term of the loan and less incentive to take on additional risk. If the lender's cost of managing these standard agency problems is positively related to the magnitude of the borrower's incentive, then maturity renegotiation will result in lower monitoring and enforcement costs.     

FHA Terminations: A Prelude to Rational Mortgage Pricing

Recent models of pricing mortgages and/or mortgage insurance have used option-pricing models as their framework. The focus is usually on default, which is viewed as a put option (to sell the house to the lender in exchange for the mortgage) and prepayment, which is viewed as a call option (to buy the mortgage from the lender). Analysis then uses techniques like those used to price options in capital markets. Unfortunately, homeowners do not seem to exercise their option as quickly as do traders in organized markets. We estimate prepayment and default functions, which are meant to be a first step in developing modified, option-based models of mortgage pricing.     

Do Riskier Borrowers Borrow More?

Conventional wisdom in the mortgage industry holds that loan-to-value (LTV) ratios are positively correlated with mortgage default rates. However, not all empirical studies of mortgage loan performance support this view. This paper offers a theoretical signaling model of why the correlation between LTV ratios and default risk is contingent upon the default costs of the borrower. Specifically, the model proposes that when default costs are high there exists a separating equilibrium in which risky borrowers will self-select into lower LTV loans to reduce the probability of facing a costly default, while safe borrowers will self-select into higher LTV loans as a signal of their enhanced creditworthiness. This adverse selection process gives rise to the possibility of higher default probabilities for lower LTV loans. Conversely, when default costs are low the conventional result, in which risky borrowers select higher LTV loans than safe borrowers, is obtained. Empirical results, based on a sample of 859 single-family residential mortgage loans drawn from the portfolio of a national mortgage lender, are consistent with the separating equilibria predicted by the model.     

Reduced Form Coefficients, Structural Coefficients, and Mortgage Redlining

Empirical studies of redlining have long been plagued with the identification problem. Observed behavior in alleged redlined areas is ultimately a combination of both demand and supply influences coming from both mortgage and housing markets. How then can inferences from reduced form experiments be utilized to provide unambiguous structural information concerning purely lender behavior? This problem is analyzed in detail with the help of an implicitly specified skeletal model of the mortgage and housing markets. The results suggest that structural inferences from reduced form information are, indeed controversial at best. Although this fact is fairly widely known at present, many research techniques still utilize an underlying reduced form methodology. It is hoped that the methodology employed in this paper highlights the identification problem in a manner that will generate greater insight into this issue. Some remedies are suggested in line with the general econometric literature dealing with structural identification.     

Temporary Buydowns and Affordability

This paper is directed to a neglected aspect of the problem of home ownership affordability: the impact on affordability of temporary buy downs. A temporary buydown is an option offered to home buyers to reduce the mortgage payment in the early years of the loan. The borrower allocates cash up front to an escrow account from which funds are withdrawn monthly to supplement the borrower's mortgage payment.
Temporary buydowns are underused partly because of the difficulty of determining whether, in any particular case, they will increase affordability. This paper develops a new instrument called the maximum affordable mortgage (MAX) which automatically allocates the buyer's available cash between buydown, down payment and other uses in a manner which maximizes affordability for the buyer, subject to whatever underwriting constraints the investor wishes to impose on payment graduation and/or the total size of the buydown.
The lender originating the MAX must be able to solve a complex algorithm at the point of sale, but the complexity is all behind the scenes. Using a computer, a loan officer can quickly find the cash allocation that maximizes affordability. The power of the MAX in increasing affordability may be enhanced if it is combined with a buyup wherein the lender trades off lower points against a higher rate.     

The Impact of Interstate Foreclosure Cost Differences and the Value of Mortgages on Default Rates

Previous research on mortgage default has focused on the costs, benefits, and characteristics of the mortgagor. In such studies default rates have been taken as a measure of mortgage risk. In this paper we present a model where the position of the lender affects the default-foreclosure process. Important to the lender's decision to foreclose rather than renegotiate an existing loan are the value of mortgage and the legal costs associated with foreclosure.
The empirical evidence supports the hypothesis that both the value of the mortgage and legal foreclosure costs affect the foreclosure rate. In those states where legal foreclosure costs are high rates are significantly less than where costs are low. This suggests that previous models which include only the costs and benefits of default to the borrower are incomplete and that foreclosure rates can not be taken as a strict measure of mortgage risk. That is, low foreclosure rates may indicate that losses occur in other forms of loan negotiation rather than in expensive legal costs.     

Prepayment Penalty as a Screening Mechanism for Default and Prepayment Risks

The objective of this article is to offer a theoretical model of asymmetric information to analyze the screening role of prepayment penalty. We consider both default risk and prepayment risk. What makes the role of prepayment penalty interesting and more complicated is that a borrower's contract choice could send conflicting signals to the lender about that borrower's default and prepayment risk type. This is different from earlier theoretical models of mortgage choice under asymmetric information where a certain aspect of the contract (e.g., discount points or loan‐to‐value ratio) is explored as a screening mechanism for a single risk dimension (default risk or prepayment risk) of the borrower type. We show the existence of separating equilibria where different default and prepayment risk types choose contracts with different combinations of prepayment penalty and interest rate. For certain parameter combinations, the model also generates a pooling equilibrium where all borrower types obtain the same contract. Our analysis could offer a partial explanation for the observation that contracts with prepayment penalties are a lot less prevalent than contracts with points.     

A Research Note on Factors Associated with Troubled Residential Construction Loans

Several factors considered significant in determining the level of construction lending risk were tested for association with samples of troubled and good residential construction loans. Generally, a priori expectations were confirmed. The strongest associations with risk were found for unavailability of materials, followed by inflationary cost overruns and borrower experience.
Interest rates on the sample of troubled loans did not significantly differ from the rates on the sample of good loans, suggesting the lender did not adequately recognize elements of lending risk, or that those risks were ignored.     

Costing RAM design and test analysis model for production facility

The objective of this paper is to provide a model for effective implementation of costing RAM (reliability, availability and maintainability) management in the design and procurement of production facility. This research proposed a two-stem model of costing RAM design and test for production facility. In Step 1, a static model is proposed to find an initial system configuration to meet the required performance based on system RAM and life cycle cost (LCC) and analyze the trade-off relationships between various RAM factors (reliability and maintainability) and LCC. In Step 2, we developed time and failure truncated models for system reliability test and analysis. For computational purposes, we developed computer programs and have shown the sample results. By the sample test run, the proposed model has shown possibilities to provide a good method to analyze system performance evaluation for both design and operational phase. This model can be applied to a wide variety of systems, not only for costing RAM of the production facilities but also for the other kind of equipment.     

Servicer Contracts and the Design of Mortgage‐Backed Security Pools

We develop a unified model of mortgage and servicer contracts. Renegotiating mortgage contracts following default is strictly Pareto improving, if the lender gathers updated information. An incentive compatible servicer contract requires the servicer to hold a risk position that has a value strictly greater than the cost of exerting effort. This risk position cannot in general be approximated with a horizontal “first‐loss” position. An alternative, forming a nondiversified pool, preserves pool‐wide information, avoids the cost of an incentive compatible servicer contract, and may increase MBS value.     

Semivariance of Property Value Estimates as a Determinant of Default Risk

Standard practice in the residential mortgage underwriting industry is to estimate collateral values via independent appraisals conducted by third parties. This paper empirically examines the role of property value ( i.e. , appraisal) uncertainty as a determinant of default on residential mortgage loans. Based upon an analysis of 1,428 residential loans drawn from the portfolio of a national mortgage lender, we find evidence that semivariance in property value uncertainty is related to default risk. Specifically, subject properties that are valued above the sales price of recently sold "similar and proximate" properties show evidence of greater default risk. Interestingly, a variance (range) measure of property value uncertainty is not significantly related to default risk.     

Risikoprämien im Erdölhandel

Risk premiums are not directly observable, since they are only a part of futures prices. In an efficient market, the historical price at maturity of the futures prices can be taken as an approximation of expected spot price. Therefore, risk premiums are identified as the bias between the historical spot prices at maturity and futures prices with the correspondent maturity. The Brent Futures markets with maturities of four months are examined. The calculated risk premiums are positive and the deviations from the historical spot price are left skewed, which implies that buyers in crude oil markets are risk averse and prudent. The risk premiums have approximately tripled in 2001–2008 to 1991–2000. This is caused either by an increased specific market risk or by inefficient information of market participants.     

Real Estate Valuation Models: Lender and Equity Investor Criteria

The use of valuation models that focus on lender criteria has been growing in the appraisal field. In the rush to build lender criteria into real estate valuation models, equity investor criteria, expectations, and requirements occasionally have been ignored. The specific criteria considered in this paper are the loan-to-value ratio and the debt coverage ratio for lenders and the equity dividend rate for equity investors. Each of these three criteria may be a binding constraint on value.
Graphical analysis provides a framework within which major real estate valuation models (i.e., Ellwood, McLaughlin, Gettel, Lusht-Zerbst, and Steele) are compared. A new valuation model (i.e., the Cannaday-Colwell model) is developed which utilizes the equity dividend rate.
The three definitional models (i.e., McLaughlin, Gettel, and Steele) are found to be relevant only by mere coincidence. Each of these models simultaneously considers two of the three key criteria, completely eliminating the possibility of consideration of anything else; i.e., the models become tautological.
It is shown that the discounted cash flow based models (i.e., Ellwood, Lusht-Zerbst, and Cannaday-Colwell) each tell one-third of the story. One of these models will be relevant depending upon whether the binding constraint is the maximum loan-to-value ratio, the minimum debt coverage ratio, or the minimum equity dividend rate. The relevant model is the one that yields the lowest value estimate of the three.     

项目风险管理的持续改进方法

风险管理是项目管理的主要部分，其目的是追求积极活动的最大化和不利活动的最小化。持续改进思想被引入到项目风险管理，体现管理思想和原则方面的意义。持续改进的风险管理由一系列与项目有关风险的流程、方法和工具组成，并为风险管理提供了一个主动管理的合理环境。章对项目风险管理的持续改进的成熟度模型、功能、步骤和价值进行了研究。     

Using influence strategies to advance supplier delivery flexibility: The moderating roles of trust and shared vision

This study explores trust and shared vision moderate the relationship between the manufacturer's influence strategies and supplier delivery flexibility. The major components of this study are based on reviews of marketing research that focus on influence strategies and literature regarding supply chain flexibility. The results show that the request strategy has a negative effect on supplier delivery flexibility. The model predicts that trust and shared vision have an asymmetrical effect across recommendations, information exchange, and promises influence strategies. When the relationship contains a highly shared vision, a manufacturer's use of the recommendation influence strongly promotes supplier delivery flexibility, whereas the use of a promise strategy depresses supplier delivery flexibility. In contrast, an information exchange strategy will have a negative effect, but the promise strategy will have a positive effect on supplier delivery flexibility when trust is high. This paper contributes to guidelines for management on how to align their suppliers for delivery flexibility to respond quickly to customer demands.