The Effects on Mortgage Repayments of Restrictions on the Enforcement of Due-on-Sale Clauses: The California Experience

Unexpected increases in the cost of mortgage funds have imposed substantial losses on mortgage lenders. The losses are compounded by the decline in mortgage repayments as homeowners hang on to their low-rate mortgages. The enforcement of due-on-sale clauses is one option lenders have had to inhibit reductions in the turnover of low-rate mortgages. Recently a California Supreme Court ruling restricted the use of due-on-sale clauses. As a result, California state-chartered associations can no longer use due-on-sale clauses to raise mortgage rates. At the same time, most federally chartered associations in California continued the unrestricted enforcement of due-on-sale clauses. This paper examines the behavior of repayment rates at restricted state and unrestricted federal associations in California. The results suggest that for each percentage point new mortgage interest rates exceeded rates on existing mortgages, repayment rates at federal associations declined by 1.532 percentage points. The inability to prevent mortgage assumptions caused repayment rates at state-chartered associations to fall 0.406 percentage points more than federal association repayment rates. The additional decline has added substantial income losses to California state associations.     

Simulations of Savings Associations Using Alternative Mortgage Instruments

This paper reports on the development and use of a deterministic, accounting identity, simulation computer model of a federally chartered savings and loan association to observe the effect upon earnings and net worth growth, over the 1964 to 1974 period, of the use of various alternative mortgage instruments. Experiments were conducted on several kinds of variable rate mortgages, graduated payment mortgages, and price level adjusted mortgages; various interest reference rates were tested along with alternative systems of constraining VRM changes, alternative graduation rates, and various systems for paying interest to savers.     

Residential Mortgage Markets and the Cost of Mortgage Funds

Early federal housing finance policy appears to have been largely directed at making mortgages more marketable. The creation of FHA, FNMA and FHLMC were designed to homogenize the mortgage instrument and to develop a secondary market for it. Apparently because of a lack of demand for marketability by investors, extensive trading of mortgages has not developed. Nonetheless, the fantastic growth in mortgage pools (as well as the unanticipated growth in FNMA holdings) has increased competition in the supplying of some intermediation functions (mortgage bankers have greatly expanded originations and servicing), has improved interregional flows of mortgage funds, and has given mortgage borrowers a greater access to capital markets generally. The principal result has been a decline in the mortgage rate relative to other market rates, although the inflation-triggered explosion in the demand for mortgage funds in recent years appears to be offsetting the impact of the growth in federal credit broadly defined.     

Mortgage Default Risks and the 1971 San Fernando Earthquake

The paper is based on a study of mortgage default risks associated with natural disasters. These risks are faced by holders of mortgages when forced by default to acquire damaged properties. A sample of residential mortgage properties damaged in the 1971 San Fernando, California earthquake is studied. Some of the mortgagors defaulted while others did not. The paper identifies and analyzes those variables associated with default using discriminant and probit regression analysis. The study concentrates on earthquake exposures in California, but has implications for all major disasters.     

住房按揭贷款风险分析及防范

住房按揭贷款自开办以来，已初具规模。在实际运作中其风险仍无处不在，尤其是在“安全性”上存在着政策、市场、银行、抵押物等风险。要实现住房贷款的可持续发展，必须进行风险防范。章在分析当前住房按揭贷款风险的基础上，提出了几点防范措施。     

A Contingent Claims Analysis of Price Level-Adjusted Mortgages

This paper examines the performance of alternative mortgage instruments in an environment of stochastic price fluctuations. The two most widely discussed contracts that deal with inflation are the adjustable-rate mortgage (ARM) and the price level-adjusted mortgage (PLAM). The former compensates for inflation by paying the nominal interest rate, which contains a component reflecting the rate of inflation. Nonetheless, even without explicit nominal amortization, this results in real amortization and hence a tilting effect. In addition, the inflation component of the nominal interest rate is shown to reflect only anticipated and not actual inflation, and so the real value of an ARM fluctuates due to unanticipated inflation. A PLAM suffers from none of these defects. To the extent that one is interested in a mortgage whose properties reflect the underlying real environment, the price level-adjusted mortgage is the ideal instrument.     

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.     

The Optimal Mortgage Payment Path Under Price Uncertainty

It has been shown that in a world of certainty, individuals with rising income streams will choose a graduated payment mortgage over the standard flat payment mortgage. The present paper extends this analysis by introducing uncertainty about future inflation rates. We show that the risk-averse individual, when faced with uncertainty, will choose a less graduated payment path than in the certainty situation. While not conclusive, the analysis may cast some doubt on the suboptimality of the standard flat payment mortgage.     

An Analysis of the Ex Ante Probabilities of Mortgage Prepayment and Default

Observed mortgage prepayment and default rates have been far different than the ruthless option exercise rates predicted by contingent claims models of mortgage pricing. The discrepancies have been attributed to both the competing-risk nature of prepayment and default and to transactions costs. This paper tries a different means of reconciliation. We introduce a third stochastic process, household income, into the usual pricing model that includes only the spot interest rate and the house price. The presence of income allows considering consumption-theoretic determinants of termination. The role of mortgage underwriting rules in restricting optimal prepayment is also explicitly modeled. Numerical ex ante prepayment and default rates based on the theoretical model come much closer to historical experience.     

Mortgage Choice†

Mortgage choice refers to a set of problems faced by a homeowner that includes the choice of a loan-to-value ratio, the refinancing and default decisions, and the choice of mortgage instrument. This paper reviews much of the literature that has been written on the topic. It begins with a listing of the major stylized facts the literature seeks to explain. Models used to explain mortgage choice are categorized and discussed. It is argued that the relatively simple certainty model that incorporates liquidity constraints seems capable of explaining some of the stylized facts, but is unable to explain some others. The paper concludes with a discussion of three policy questions that require a better understanding of mortgage choice before they can be answered. The paper is based upon the author's Presidential Address to the American Real Estate and Urban Economics Association, which was delivered in Atlanta, Georgia on December 29, 1989.     

How would compliance with dietary recommendations affect revenues for agricultural producers?

Nutritionists and other health experts have recommended a range of dietary plans, and these often differ significantly. Although the USDA food guides have been the most visible in the United States, other dietary plans now are achieving greater public recognition. Our analysis extracts the nutrient recommendations for seven dietary plans and models the recommendations as shifts in demand for the nutrients. Demand shifts for nutrients are combined with nutrient composition shares to simulate the revenue implications in selected agricultural markets. Based on current consumption patterns in the United States, we find that compliance with Harvard’s Healthy Eating Pyramid would generate the greatest revenue gains for specialty crop producers in California.     

A Note on Identification of Discrimination in Mortgage Lending

This paper shows how reduced form estimates of discrimination in mortgage lending may be biased by race differences in loan demand. The result, which follows formally from the model of the mortgage lending process developed in the seminal paper by Maddala and Trost (1982), has important implications for the regulation of financial institutions. It also reinforces findings of Rachlis and Yezer (1993) and Yezer, Phillips and Trost (1994). A review of recent empirical evidence on race differences in loan demand suggests that this factor may help explain mortgage loan application differentials.     

Potential Beneficiaries from Reverse Mortgage Products for Elderly Homeowners: An Analysis of American Housing Survey Data

A variety of reverse mortgage loan programs have been available to elderly households for over a decade. The number of unrestricted reverse mortgage loans issued by the private sector has been quite small. About 12,000 loans have been issued through mid-1992. Some researchers take this to mean that the size of the potential market for reverse mortgages is also quite small. Other researchers claim that current low levels of activity reflect supply and demand problems, but that the potential market is in fact quite large. This paper uses American Housing Survey (AHS) data to estimate the potential size of the market for unrestricted reverse mortgages. The 1989 national AHS shows that there are over twelve million elderly homeowners (age 62 and over) who own their homes free and clear. Depending on their income, age and the level of home equity, the group of households most likely to benefit from reverse annuity mortgages is considerably smaller. As one approach to defining a lower bound of the estimate of potential beneficiaries from reverse mortgages, we count the number of homeowners in a prime group consisting of the older elderly, aged 70 or above, with an annual income of $30,000 or less, with home equity between $100,000 and $200,000, who have lived in their homes for over ten years. We estimate that there are about 800,000 elderly households in this prime group. For such households, reverse mortgage payments could represent a substantial percentage increase in income; other definitions of target groups can also be explored using the tables provided. The paper uses the 1985 through 1988 AHS Standard Metropolitan Statistical Area (SMSA) surveys to identify areas that have a large number of elderly homeowners in the prime target group, and in which these homeowners represent a large fraction of the elderly homeowner population. These locations are likely targets for introduction of reverse mortgage products because any campaign can be targeted towards a high concentration of likely eligible beneficiaries.     

Consumer Welfare Under the Adjustable-Rate Mortgage: Some Empirical Evidence

The theoretical literature on the economics of mortgage choice holds that consumer-borrower preference for the ARM depends largely on the FRM-ARM rate differential. However, there is no empirical evidence as to whether consumers are better off, worse off, or left indifferent with the choice of the ARM relative to the alternative FRM. This paper estimates the windfall gain or loss induced by the FRM-ARM rate differential in a multiperiod setting. The major results are as follows: (1) on the average consumer-borrowers reap windfall gain from the use of ARM, (2) but some individual consumers had windfall loss, (3) consumers with ARMs that have periodic interest-rate caps have significantly higher windfall gain than consumers whose ARMs have no periodic rate caps, and (4) the level of the windfall gain (loss) appears to be correlated with the slope of the yield curve and the level of interest rate.     

Mortgage Refinancing with Asymmetric Information

Information asymmetry exists between the lender and the borrower regarding the holding period of the mortgaged real estate; the lender does not know how long the borrower plans to own the house. This information asymmetry allows the cost of obtaining a mortgage to deviate from its value to the borrower. As a result, the exercise price of the option to refinance becomes the cost to the borrower of obtaining a new mortgage instead of the outstanding balance of the existing mortgage as used in previous models. The option to refinance is a sequential option; after the borrower refinances, a new option is obtained to refinance again in the future. A mortgage refinancing model is developed taking information asymmetry and sequential refinancing into account. The model is used to solve for (1) the value to the borrower of a callable mortgage and (2) the minimum interest rate differential between the contract rate of the existing mortgage and the market interest rate needed to justify refinancing.     

The Effects of Securitization on Mortgage Market Yields: A Cointegration Analysis

Securitization of the residential mortgage market has completely transformed the process of financing home loans in the U.S. over the last two decades. We examine the effects of securitization on yield spreads in the primary mortgage market. Cointegration techniques are employed to test the relationship between the increasing volume of mortgage securities over time and the yield spread on mortgage loan rates. We find that a 10% increase in the level of mortgage securitization as a proportion of total mortgage originations decreases yield spreads on home loans by as much as 20 basis points. Other results indicate that, while prepayment speed has a significant effect on mortgage yield spreads, default risk does not. We conclude that securitization of the residential mortgage market plays an important role in decreasing the cost of home loans.     

Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?

This article focuses on the potential externalities associated with subprime mortgage origination activity. Specifically, we examine whether negative spillover effects from subprime mortgage originations result in higher default rates in the surrounding area. Our empirical analysis controls for loan characteristics, house price changes and alternative loan products. Our results indicate that, after controlling for these characteristics, the concentration of subprime lending in a neighborhood does not lead to greater default risks for surrounding borrowers. However, we do find that more aggressive mortgage products (such as hybrid adjustable rate mortgages and low/no‐documentation loans) had significant negative spillovers on other borrowers. Stated differently, the aggressive alternative mortgage designs were more toxic to the housing and mortgage market than previously believed.     

Throwing Good Money After Bad? Cash Infusions and Distressed Real Estate

When a leveraged real estate project experience cash-flow problems, the owner must either inject additional cash or default on the mortgage. We show that it is not optimal for the owner to default as soon as net cash flow becomes negative. Surprisingly, the owner can expropriate some of the mortgage lender's wealth by injecting cash and continuing to pay interest. When the owner has cash constraints, outside investors may be able to extract significant economic rents by financing distressed real estate projects. These results have interesting implications for mortgage lending and the pattern of real estate transaction volume.     

Mobility-Tenure Decisions and Financial Credit: Do Mortgage Qualification Requirements Constrain Homeownership?

Housing analysts have generally assumed that mortgage qualification requirements significantly constrain homownership, however there has been no empirical evidence of this effect. By explicitly modeling and estimating the impact of mortgage qualification requirements on households' mobility and tenure decisions, this paper provides the first empirical evidence of the effect of these criteria on homeownership. The estimation results suggest that in 1986, mortgage qualification criteria did not provide a large constraint on homeownership. However, they also show that the impact of these criteria increases as the flow costs of owning decrease relative to those of renting. This implies that the nationwide significance of these constraints will vary with fluctuations in the macro economy, and that policies designed to limit the effect of these requirements will be more successful in economic environments favorable to homeownership.     

Distributional Consequences of Alternative Mortgage Instruments

One of the major factors hindering the introduction of alternative mortgage instruments is the possibility of adverse consequences to certain groups of households seeking to obtain credit for homeownership. This study examines this issue through an analysis of cross-sectional household data obtained from the 1970 Survey of Consumer Finances. Using multiple regression analysis, a series of structural demand models are derived and estimated. These models relate the probability of homeownership, levels of housing consumption, mortgage credit usage, and downpayment to income, assets, and other socioeconomic variables, to variables representing the relative price of housing and homeownership, and to certain variables representing the present value and cash flow costs of mortgage credit. Several mortgage-related variables are found to be influential in housing demand decisions. These models are then used to simulate alternative instrument introduction. The graduated-payment and price-level adjusted mortgages are predicted to be superior to the current instrument of mortgage finance in encouraging homeownership, housing consumption, and the use of mortgage credit among all household classes. The standard variable-rate mortgage, especially one tied to a short-term interest rate, is predicted to be inferior to the standard instrument, with the most adverse impacts upon lower-income, young, elderly, and black households.