Why are mortgage rates so uniform?

Conclusion Any reasonable model of mortgage lending concludes that interest rates depend on loan and borrower characteristics. In this paper, the rate is a function of the loan-to-value ratio, the parameters of the densities of future price of housing and income, deposit rate, and cost of foreclosure. Nevertheless, in practice, each lender charges only one rate to all borrowers. This is first explained by the difficulty of estimation of the parameters of the density functions. Since lenders cannot categorize their borrowers, they treat them uniformly and set minimum standards to minimize the risk of default by each borrower. Mortgage insurance, moreover, enables lenders to lend risklessly outside of the range in which they can operate risklessly on their own. Second, mortgage rate uniformity is explained by the lenders' risk aversion. Third, when borrowers are separated into discrete categories, uniform rates can result from perfect categorization of borrowers with respect to the future value of the relevant random variables. It is more likely, however, that lenders cannot categorize borrowers perfectly and that interest rates vary substantially among categories. As rates jump from one category to the next and borrowers are reluctant to gain small increases in loan size at significantly higher rates, lenders respond by offering only the basic category of loans.     

Observations on the conditionality of international financial institutions

Conditionality, the terms imposed by international financial institutions on borrowing countries, has been regarded by critics as being too inflexible and focussing too narrowly on demand forces and monetary policy instruments. The major intent of the paper, however, is to shift the discussion of conditionality to its functions in relation to private international lending. Conditionality provides information to lenders and certification of borrowers which, by decreasing uncertainty, may increase the quantities and reduce the costs of private lending. Yet restrictions on total and/or foreign credit may also reduce competition. These are examples of neglected issues of conditionality which deserve more attention.     

Optimal Debt? On the Insurance Value of International Debt Flows to Developing Countries

According to reputation models of sovereign debt, the incentives to repay are proportional to the income insurance benefits provided by the access to international markets. This paper, however, documents that private net lending to developing countries exhibits a procyclical or acyclical pattern, contradicting this premise. By contrast, official debt net flows exhibit a countercyclical patter. In addition, the paper shows that (both current and past) defaults are associated with lower net debt flows. The findings suggest that, while reputation models may explain the preferred creditor status enjoyed by official lenders, they cannot account for the presence of sovereign debt markets in developing countries.     

In the shadow of big tech lending

We investigate the impact of Big Tech lending on non-bank traditional lenders, which have a more overlapping clientele with Big Tech lenders than traditional banks. Our empirical methodology exploits geographical differences in Big Tech penetration ratios and adopts the instrumental variable (IV) approach using the FinTech payment adoption ratio and the distance to the Big Tech's headquarter. We find that the competition from Big Tech worsens the performance of branches facing stronger Big Tech competition by reducing the number of borrowers and the amount of loans. Moreover, branches in cities highly penetrated by Big Tech lending tighten the lending standard by reducing loan-to-value (LTV) ratios, measured as the approved loan amount per unit collateral value, while keeping the average collateral requirement unchanged. Our findings are consistent with the cream-skimming hypothesis that Big Techs possess better screening technology and reduce the quality of borrowers applying for traditional loans. Our results document novel changes in and responses of the non-bank traditional lending business in the Big Tech era.     

Proximity,information, and loan pricing in internal capital markets: Evidence from China

We examine the effect of geographic proximity on loan pricing in internal capital markets by focusing on the role of information. Using a hand-collected dataset on entrusted loans within business groups in China, we find that loan prices are positively associated with the distance between borrowers and lenders, which suggests that a reduction in distance facilitates the monitoring of borrowers and gathering of soft information by lenders. Results remain unchanged after controlling for potential endogeneity. Our findings are further pronounced (1) for lenders with headquarters that are time constrained; (2) during the early years of our sample period, when the Internet and transportation infrastructure were less developed; and (3) for borrowers for whom information uncertainty is likely to be substantial and soft information is likely to be valuable, such as young borrowers and borrowers in different industries to lenders. This paper sheds new light on the role of geographic proximity in intra-group loans within business groups.     

Commercial bank lending to developing countries: Supply constraints

Middle-income developing countries rely heavily on commercial bank borrowing for the bulk of their financing requirements, but borrowing from this source cannot be projected with confidence. Privately owned financial institutions are subject to a number of capital and regulatory constraints which can adversely affect (will heavily influence) the level and direction of future lending to developing countries. Moreover, the volatility and short-term character of commercial bank lending suggests an urgent need to reduce the role of commercial banks in recycling the OECD and OPEC surplus, and to create new mechanisms designed to ensure more stable and longer term sources of capital to developing countries.     

Sovereign Credit Ratings and Private Capital Flows to Low‐income Countries

Abstract: As low‐income countries obtain sovereign credit ratings in increasing numbers, this paper examines the potential effects on the composition and volume of private capital flows. Sovereign credit ratings are unlikely to overcome the informational asymmetries that impede private capital flows, and due to new international capital adequacy rules may actually raise the costs of capital for private borrowers. Nevertheless, they could help develop local and regional securities markets and assist mature private borrowers in hitherto unrated countries. Also, there may be beneficial disciplining effects on policy makers, and a growing differentiation between countries subject to an Africa‐wide risk premium.     

The mother of all sudden stops: capital flows and reversals in Europe, 1919–32

New data documenting European bond issues in major financial centres from 1919 to 1932 show that conditions in international capital markets and not just in borrowing countries are important for explaining the surge and reversal in capital flows. In particular, the sharp increase in stock market volatility in the major financial centres at the end of the 1920s figured importantly in the decline in foreign lending. This article draws parallels with Europe after 2008.     

The New Deal and the origins of the modern American real estate loan contract

The fully amortized mortgage loan contract is an important instance of financial innovation in the U.S. residential mortgage market. We examine the adoption of this contract from the 1880s to the 1930s by building and loan (B&L) associations, the nation's most important institutional home mortgage lenders at the time. A chain of complementary innovations by B&Ls gradually reduced the costs of adopting amortization, supporting moderate use by the 1920s. During the crisis of the 1930s, the poor performance of the traditional B&L loan contract radically increased the benefit of adoption, as borrowers demanded the new contract. The adoption examined here occurred primarily in the conventional loan market because B&Ls, unlike other lenders, generally avoided the use of the new Federal Housing Administration insurance program. The New Deal may have had more impact through new federal savings and loan charters, which incorporated many of the complementary innovations that supported the new form of lending.     

Regime change and debt default: the case of Russia, Austro-Hungary, and the Ottoman empire following World War One

We consider the effect of the three largest regime changes following World War One on the foreign debt repayments of the succeeding regimes. The Bolsheviks repudiated the Tsarist debt, both external and internal in early 1918, and could not borrow internationally until the 1970s. The Austro-Hungarian successor states, with the exception of Romania, remained on good terms with lenders, and quickly gained access to foreign capital. However, the Ottoman successor states entered into protracted negotiations before accepting responsibility for a share of the debt, which meant they faced a lengthy delay before being able to re-enter the international capital market. We analyze these events using a game theoretical model of incomplete information, whereby capital markets can not directly observe a government’s ‘type.’ We find that there were two main economic reasons why countries did not settle their debts after their regimes changed. Some countries, in particular Russia, did not value continued credit market access as highly as before, and second that international lenders will not trust a regime in default with a new loan.     

Lenders’ Response to Peer and Customer Restatements

We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower's switching costs are high. Restatements by peer firms in the same industry also increase a borrower's loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank's lending portfolio, suggesting that a lender's personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.     

Discrimination in hire‐purchase lending by retailers of consumer durables in apartheid South Africa

A double‐hurdle partial observability model of hire‐purchase lending is specified and estimated to test for racial discrimination by retailers of consumer durables during apartheid. ‘Discrimination’ is defined as supplying no loans or less desirable loans to certain borrowers, who do not differ from more successful borrowers with respect to creditworthiness but who do differ with respect to race. There is strong evidence of discrimination. In particular, black households are 13 percentage points more likely to desire a hire‐purchase loan but not to have one supplied to them than are other households equivalent in all ways except race. Although the statistical test cannot determine whether race affected lending because lenders were bigoted or because race is correlated with unobserved characteristics correlated in turn with creditworthiness, increased access to formal loans for all South Africans could be promoted by relaxing the Usury Act and by removing from loan applications information that could reveal an applicant's race.     

P2P网贷借款人逾期率的实证研究——以“人人贷”为例

借款人逾期行为是P2P网贷投资人面临的主要风险,而平台信息披露与信用评级是投资人能够直接获取的有效信息。收集2016年9月-2017年9月人人贷上已完成交易的借款标的数据,通过构建Probit回归模型和Logistic回归模型,比较二者预测拟合度进而选择预测更准确的回归模型,来研究影响借款人发生逾期行为的因素,并建立借款人逾期率的概率模型。帮助投资人根据此模型对借款人的逾期行为进行初步判断,从整体上减少资金回笼不利的局面,并提高网贷平台的风险控制能力,促进网贷平台的持续发展。     

For the Motion

The interest rate is one of the most important factors in farmers’ decision-making of borrowing and lending in the informal financial market in China. This paper explores the determinants of the interest rate with microfinance data. Results show that the income disparity, the relationship between borrowers and lenders, the usage of borrowing, and formal credit constraints are important factors affecting interest rates. More importantly, to borrow from those in the higher income hierarchy, farmers have to bear higher interest rates. We attribute this to different social capitals across income groups and higher default risks for the poor. This paper contributes to a better understanding of the informal financial market in rural China and sheds light on the mechanism of higher informal interest rate formation.     

Bank Monitoring and Financial Reporting Quality: The Case of Accounts Receivable–Based Loans*

Using novel receivable-based loan data, we study the effect of aging-report loan covenants on borrowers' accounts receivable reporting quality. Our purpose is to highlight a channel that lenders use to obtain private information and to understand whether lenders' information acquisition affects the financial reporting quality of borrowers. Compared to receivable-based borrowers without aging-report requirements (control firms), borrowers with such requirements (test firms) increase their receivable reporting quality significantly after loan initiations. The shift in reporting quality is more pronounced when borrowers have weak bargaining power. Our results lend support to the argument that lender information access affects borrowers' reporting quality.     

Debt dilution in 1920s America: lighting the fuse of a mortgage crisis

The idea that real estate could have contributed to banking crises during the Great Depression has been downplayed due to the conservatism of mortgage contracts at the time. For instance, loan‐to‐value ratios often did not exceed 50 per cent. Using newly discovered archival documents and data from 1934, this article uncovers a darker side of 1920s US mortgage lending: the so‐called ‘second mortgage system’. As borrowers often could not make a 50 per cent down payment, a majority of them took second mortgages at usurious rates. As theory predicts, debt dilution, even in the presence of seniority rules, can be highly detrimental to both junior and senior lenders. The probability of default on first mortgages was likely to increase, and commercial banks were more likely to foreclose. Through foreclosure they would still be able to retrieve 50 per cent of the property value, but often after a protracted foreclosure process. This would have put further strain on banks during liquidity crises. This article is thus a timely reminder that second mortgages, or ‘piggyback loans’ as they are called today, can be hazardous to lenders and borrowers alike. It provides further empirical evidence that debt dilution can be detrimental to credit.     

Does a large loss of bank capital cause Evergreening? Evidence from Japan

Using the real estate lending share of the bank’s loan portfolio at the peak of the land-price bubble as an instrument for bank capital, we identify the impact of capital adequacy on the allocation of bank lending under the Basel regulatory framework. We find that, in Japan, a large loss of bank capital caused by the regulator’s excessively tough stance towards banks not only induced the contraction of the bank lending supply but also the banks’ reallocation of their lending portfolios to financially unhealthy industries with a higher concentration of non-performing loans.     

Loan Sales and Borrowers’ Accounting Conservatism

We examine whether initial loan sales in the secondary loan market relate to borrowing firms’ accounting conservatism. We find that borrowing firms exhibit a significant decline in accounting conservatism after the initial loan sales. We show that the decline in borrower conservatism is more pronounced for firms that borrow from lenders with lower monitoring incentives and for firms that have lower incentives to supply conservatism. The baseline results are robust to a battery of sensitivity tests. Collectively, we provide corroborative evidence that lead lenders’ monitoring incentives enforce accounting conservatism in the private debt market, and that lead lenders play a more prominent role than secondary loan market participants in shaping corporate (conservative) reporting.     

Do Small Farmers Borrow Less When the Lending Rate Increases? Interest Rate Elasticity of Rice Farmers in the Philippines*

The new generation of credit programs directed at small borrowers emphasizes financial sustainability. Based on anecdotal information, proponents of cost recovery claim that raising formal lending rates would have a minimal impact on borrowing. However, rigorous evidence for this conjecture is sparse. The present study conducts an econometric test of this conjecture using data from a survey of small rice farmers from the Philippines. Alternative regression techniques tend to reject the conjecture; in particular, a regression that controls for selection effects shows a unitary elastic response of formal borrowing to the lending rate.