The real consequences of bank mortgage lending standards

We examine the real effects of changes in bank mortgage loan underwriting standards by combining responses to the Federal Reserve’s Senior Loan Officer Opinion Survey, application information from the Home Mortgage Disclosure Act, and local housing market measures over 1990 to 2013. Tightened standards are associated with a 1 percentage point increase in denial rates and a 5% fall in loan issuance, controlling for applicant pool changes, but no change for predominantly-securitizing banks. In areas with more exposure to banks that have tightened standards, mortgage delinquency rates, house prices, new home sales, and residential construction employment fall substantially.     

Deconstructing a Mortgage Meltdown: A Methodology for Decomposing Underwriting Quality

Technical progress in originating and pricing mortgages has enabled a trend since 1979 toward relaxed credit standards for lending, reflected in rising foreclosure rates. We develop a methodology for decomposing the trend in mortgage performance into a part due to economic conditions and a part due to underwriting changes, and provide natural metrics or indices of underwriting quality and economic conditions. The recent mortgage debacle can be attributed about equally to each factor. Important underwriting characteristics were eased in the 1990s, but the negative effects of lower standards were masked by strong local and national economic conditions. After 2002, there was little change in observable loan characteristics, but loan performance still eroded, even after controlling for the economic environment. Our evidence suggests that erosion after 2002 must have arisen from underwriting covariates that are unobservable to investors, consistent with the hypothesis that moral hazard in “nonagency” securitizations caused underwriting risks to be mispriced.     

Simultaneity bias in mortgage lending: A test of simultaneous equations models on bank-specific data

This study uses simultaneous equations models and single-equation models to test for simultaneity bias in mortgage refinance data compiled by a regional bank. The purpose of the study is to assess the claim that single-equation models of the lending decision produce biased and inconsistent parameter estimates of endogenous mortgage terms. Bank-specific data are analyzed to avoid bias resulting from uncontrolled policy, training, or underwriting differences across banks. Importantly, the data contain all variables the regional bank identified as important factors in explaining its loan disposition results. After controlling for applicants' debt, income, credit history, and requested loan term, I find that the race coefficient in single-equation models is biased upward, while the loan-to-value ratio coefficient is biased downward, although both biases are insignificant. Overall, the results suggest that simultaneous equations models are preferable to single-equation models in tests for discrimination, and can be used to determine the extent of race coefficient and loan-to-value ratio coefficient bias in single-equation models.     

Residential Mortgage Lending and Borrower Risk: The Relationship Between Mortgage Spreads and Individual Characteristics

The mortgage banking environment in Hong Kong is quite different from that in the United States. For example, the secondary mortgage market and mortgage insurance only started after 1997. Using a large data set on mortgages, we examine empirically how mortgage rates in this market vary with various individual borrower, property, and loan characteristics. We find that mortgage rates in Hong Kong do vary with individual characteristics, which suggests credit sorting according to both prepayment risk and default risk, as a higher mortgage rate is found to be related to either higher collateral (a lower loan-to-value ratio) or slower prepayment. The empirical results suggest that lenders in Hong Kong can observe the risk type of individual borrowers to a certain extent and charge a corresponding mortgage spread. Overall, the evidence is consistent with the sorting-by-observed-risk paradigm as in Berger and Udell (1990).     

Subprime Lenders and Mortgage Market Completion

Without a subprime market, some borrowers by virtue of poor credit history, unstable income, and other characteristics are unable to qualify for a mortgage. With a subprime market, there is a more complete credit supply schedule with the market pricing for poorer credit quality in the mortgage rate. By completing the capital market, subprime lenders reduce borrowing constraints. The result is a social welfare gain. Low-credit applicants otherwise denied funding are able to qualify by paying higher interest rates in exchange for offering more equity or lower loan-to-value ratios. This prediction is consistent with the subprime applicants financing or refinancing their mortgages at relatively low loan-to-value ratios.     

Loss given default of high loan-to-value residential mortgages

This paper studies loss given default using a large set of historical loan-level default and recovery data of high loan-to-value residential mortgages from several private mortgage insurance companies. We show that loss given default can largely be explained by various characteristics associated with the loan, the underlying property, and the default, foreclosure, and settlement process. We find that the current loan-to-value ratio is the single most important determinant. More importantly, mortgage loss severity in distressed housing markets is significantly higher than under normal housing market conditions. These findings have important policy implications for several key issues in Basel II implementation.     

Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex ante appraised value. We then estimate proportional hazard models of mortgage default and find that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are significantly related to default risk. Using valuations subsequent to loan default, we are also able to evaluate how well house price indices perform in terms of estimating current loan-to-value and offer some additional evidence on the controversy over the role of net equity versus trigger events as determinants of mortgage default. We also show that defaults are related to ex ante measures of housing market conditions, with additional implications for underwriting policies and the current industry trend away from traditional appraisal and toward automated valuation.     

Building Stable Mortgage Markets: Lessons from Canada's Experience

The global financial crisis illustrated the high costs of boom–bust cycles in housing and mortgage markets and the importance of implementing policy frameworks that mitigate the risk of these events. This article discusses elements of Canada's policy framework that contributed to the relatively good performance of its mortgage market in recent years, including supervisory practices and mortgage underwriting standards. Lender recourse and the nondeductibility of mortgage interest payments played a complementary role. Ongoing policy challenges are also identified, including the need for monitoring to ensure the current prolonged period of low interest rates does not lead to levels of debt and house prices that create future instability in housing and mortgage markets.     

Bias in estimates of discrimination and default in mortgage lending: The effects of simultaneity and self-selection

The common practices of estimating single-equation models of mortgage rejection to test for discrimination in mortgage markets or single-equation ex ante mortgage default equations to validate underwriting criteria produce biased and inconsistent parameter estimates. This is due to problems of simultaneous equations bias which arise because, in a world of imperfect information, mortgage terms are not exogenous to the rejection or default decision. In addition, mortgage default estimates are also subject to selection bias. Monte Carlo experiments are used to study the nature and extent of likely bias in single-equation estimation results. We find that rejection equation estimates indicate discrimination when none exists and that estimated coefficients of mortgage terms, such as the loan-to-value ratio, are also subject to significant bias in both rejection and default equations.     

The Neighborhood Distribution of Subprime Mortgage Lending

Subprime lending in the residential mortgage market, characterized by relatively high credit risk and interest rates or fees, has developed over the past decade into a prominent segment of the market (Temkin, 2000). Recent research indicates that there is geographical concentration of subprime mortgages in Census tracts where there are high concentrations of low-income and minority households. The growth in subprime lending represents an expansion in the supply of mortgage credit among households who do not meet prime market underwriting standards. Nonetheless, its apparent concentration in minority and lower income neighborhoods has generated concerns that these households may not be obtaining equal opportunity in the prime mortgage market. Such lending may undermine revitalization to the extent that it is associated with so-called predatory practices.     

A Proportional Hazards Model of Commercial Mortgage Default with Originator Bias

A proportional hazards model with competing risks is specified and is extended to correct for the possibility of originator bias. The model is used to examine the ability of option-theoretic models of mortgage pricing to forecast commercial mortgage defaults. Among the findings, those especially of interest include the influence of contemporaneous loan-to-value and debt-service-coverage ratios on commercial mortgage default probabilities. The paper also finds that option-theoretic models of mortgage pricing are quite capable of producing default estimates that fit the actual default rates well, especially when the model is corrected for originator bias.     

住房抵押贷款提前还贷风险管理研究

从现代金融和风险管理角度看,住房抵押贷款提前还贷对商业银行是一种期权性风险,对其收取违约金并非国际惯例,也并不是有效的风险补偿方式。商业银行应适应市场竞争需要,接受风险转嫁并提供风险管理服务,运用风险定价技术在按揭交易价格中对提前还贷风险进行补偿。对于已承担的风险,商业银行应构建抵押贷款提前还贷的数据库,通过表内对冲和市场对冲,推出多样化的住房抵押贷款方式,积极推进住房抵押贷款证券化,从而最终增强银行的盈利来源和核心竞争力。     

Subprime Borrowers: Mortgage Transitions and Outcomes

Public policy concerns increasingly have focused on subprime lending. Our research uses a survey of prime and subprime borrowers to address whether borrowers inappropriately are channeled to the subprime segment, if once having taken out a subprime mortgage borrowers are stuck in this market segment, and whether borrowers face higher costs by taking out subprime mortgages. We find that subprime borrowers are less knowledgeable about the mortgage process, are less likely to search for the best mortgage rates, and are less likely to be offered a choice among alternative mortgage terms and instruments—possibly making them more vulnerable to unfavorable mortgage outcomes. Our analysis of market segmentation confirms that typical mortgage underwriting criteria are most important in explaining whether borrowers obtain prime or subprime mortgages—higher credit risk borrowers are more likely to get a subprime loan. Our results further show that search behavior and other demographic factors including adverse life events, age, and Hispanic ethnicity contribute to explaining market segment, suggesting that borrowers may inappropriately receive subprime mortgages. While we find some persistence to market segment—borrowers are more likely to take out a subprime mortgage if their previous mortgage came from the subprime segment—we also find that market segment is not immutable. Analysis of the survey responses indicates that borrowers with subprime mortgages significantly are more dissatisfied with their mortgage outcomes. This is not surprising because subprime borrowers look worse across typical mortgage underwriting criteria. Consistent with policy concerns, however, despite holding constant these and other factors, taking out a mortgage in the subprime segment, by itself, appears to increase dissatisfaction with mortgage outcomes. We do not provide a definitive answer to the question of whether subprime lending, on balance, serves homebuyers well by providing access to mortgage credit to those otherwise constrained, or rather serves homebuyers poorly by inappropriately assigning them to a market where costs are high and the ability to transition to more attractive prime mortgages remains low. Our analysis, however, does provide some empirical support for concerns raised by critics of subprime lending, and for this reason justifies continued public policy debate and analysis.     

Value Creation through Securitization: Evidence from the CMBS Market

Despite recent volatility and constraints in secondary market funding, analysts have ascribed substantial value creation to the securitization of commercial mortgages. Such value creation likely emanates from liquidity enhancements, regulatory arbitrage, price discrimination and risk diversification by pooling and tranching, gains from specialization in origination, servicing, and holding of mortgages, and the like. Indeed, such value creation would be consistent with past accelerated growth in the mortgage- and asset-based securities markets and the sizable profits earned by secondary market intermediaries. In this paper, we estimate the pricing effects of commercial mortgage securitization. We do so by applying loan level data from 1992–2003 to compare the pricing of conduit and portfolio loans held in CMBS structures. In contrast to portfolio loans, which are held for investment by originating institutions, conduit loans are originated for the sole purpose of sale and securitization in the secondary market. If securitization creates value, it should be evidenced in the relative pricing of conduit loans sold into CMBS pools and in a lower cost of capital to loan originators. We estimate a reduced-form model, in which the interest rate spread between commercial mortgages and comparable-maturity treasury securities varies with loan characteristics, capital market conditions, and conduit loan status. Estimation results indicate that securitization of conduit loans leads to an 11 basis points reduction in commercial mortgage interest rates. We assess robustness of results via hazard model tests for omitted variables and originator-specific effects. We further estimate a simultaneous equations model that accounts for the potential endogeneity of mortgage loan terms to the mortgage-treasury rate spread. Results of that analysis suggest a larger 20 basis points reduction in loan pricing among conduit loans sold into CMBS structures.     

A Reconsideration of the Jumbo/Non-Jumbo Mortgage Rate Differential

Consistent with a series of recent papers, the interest-rate differential between mortgages eligible for purchase based on loan size by Fannie Mae and Freddie Mac and larger loans is estimated to be 22 basis points over the 1986–2000 period. This differential averaged 19 basis points for the 1996–2000 period. Other significant effects include: loans slightly above the conforming loan limit and originated late in a calendar year often have a lower rate that nearly fully anticipates their likely characterization as a non-jumbo loan after the conforming loan limit is indexed effective each January; loan-to-value ratios affect jumbo loan rates much more than they affect non-jumbo loan rates; loans located in non-metropolitan areas have a 3 basis point differential versus loans in metropolitan areas that is surprisingly small given the likely higher cost to service non-metropolitan loans and the higher degree of uncertainty about non-metropolitan collateral values; and estimated regional mortgage rate differentials have narrowed through time.     

Is COVID Revealing a Virus in CMBS 2.0?

Commercial loan valuations crucially depend on accurate loan income, but underwritten income on commercial mortgage-backed securities (CMBS) loans is commonly overstated relative to actual property income. Consistent with these differences being originator-specific, income overstatement in CMBS 2.0 deals varies widely and persistently across originators, is priced by originators, is related across property types within an originator, is predictable ex ante, and is accompanied by inflation of past financials. Risk retention and associated regulation had no discernible effect on income overstatement. Originator income overstatement is highly predictive of pre- and COVID-period loan distress. Overall, recent market stresses reveal large systemic differences in underwriting standards across originators.     

A Test of Integration and Cointegration of Commercial Mortgage Rates

Little empirical work examines the extent to which commercial mortgage markets are integrated into broader capital markets. We use time series data on commercial mortgage yields and yields on comparable-maturity Treasury securities to identify a long-run cointegrating relationship between the two yield series. Our empirical evidence suggest that, while the yield on commercial mortgage is cointegrated with that on comparable-maturity Treasury securities, the cointegrating relationship is far less than that found between the yield on residential mortgage rates and that on comparable-maturity Treasury securities during 1980–1990 time period. However, our results also show that the spate of commercial mortgage securitization that began in early 1991 may have been a market-integrating force and caused the commercial mortgage market to become more integrated into broader capital markets. Indeed, our results suggest that changes in capital market rates are now much more rapidly reflected in commercial mortgage rates than in the 1980–1990 time period, although there is a lag.     

我国个人住房贷款利率合理水平探讨

本文从个人住房贷款利率水平影响因素角度入手，运用中美两国住房贷款利率水平比较的方法对我国当前的个人住房贷款的合理利率水平进行分析。得出了我国目前的个人住房贷款利率水平偏高的基本结论，认为我国商业银行拥有高于国外同行的超额利润，房贷存在“暴利”，我国浮动利率住房贷款利率水平合理的范围应当在4-5％左右。     

Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?

We use a detailed dataset of seriously delinquent mortgages to examine the dynamic process of mortgage default—from initial delinquency and default to final resolution of the loan and disposition of the property. We estimate a two-stage competing risk hazard model to assess the factors associated with post-default outcomes, including whether a borrower receives a legal notice of foreclosure. In particular, we focus on a borrower’s ability to avoid a foreclosure auction by getting a modification, by refinancing the loan, or by selling the property. We find that the outcomes of the foreclosure process are significantly related to: loan characteristics including the borrower’s credit history, current loan-to-value and the presence of a junior lien; the borrower’s post-default payment behavior, including the borrower’s participation in foreclosure counseling; neighborhood characteristics such as foreclosure rates, recent house price depreciation and median income; and the borrower’s race and ethnicity.     

Monitoring by financial intermediaries: Banks vs. Nonbanks

Recent empirical evidence indicates that captical markers respond positively to debt-financing announcements in the form of loan agreements. Nonbank firms, prompted largely by technological and telecommunications advances, have also entered the commercial lending market in recent years. This article finds evidence that borrowing firms experience positive abnormal returns upon announcing conclusions of loan agreements with nonbank firms. Our evidence suggests that nonbanks have replicated some of the unique attributes formerly enjoyed only by banks.