The effect of mortgage form on borrower interest rate risk: A portfolio theory approach

The problems faced by U.S. regulatory authorities in controlling residential housing cycles have resulted in a continuing search for methods of reducing the volatility of housing construction. One of the most widely discussed methods of decreasing volatility in mortgage credit is the variable rate mortgage (VRM) whose interest rate is linked to some interest rate index. In this paper we employ a portfolio theory approach to examine the relative riskiness of the VRM and fixed rate mortgage (FRM) for borrower and lender. As expected, we find that relative riskiness depends on the composition of the borrower/lender portfolio of assets and liabilities.     

The Creditor Channel of Liquidity Crises

This paper presents a model to study the transmission of liquidity shocks across financial institutions through the creditor channel. In the model, a borrower institution obtains funds from a large institutional lender and small investors. When the large lender's asset market is hit by a liquidity shock, it might decide to withdraw funding extended to the borrower. The potential withdrawal by the large lender causes small investors to panic and to close positions even if the large lender does not. Facing funding problems, the borrower has to cut its activities, contributing to further shocks to the supply of market liquidity. The original shock is exacerbated, which reinforces withdrawals by all creditors. The model helps explain how the spreading of liquidity shocks from the broker–dealer sector to the hedge fund sector and the feedback contribute to a systemic crisis.     

The Insurance Is the Lemon: Failing to Index Contracts

We model the widespread failure of contracts to share risk using available indices. A borrower and lender can share risk by conditioning repayments on an index. The lender has private information about the ability of this index to measure the true state that the borrower would like to hedge. The lender is risk-averse and thus requires a premium to insure the borrower. The borrower, however, might be paying something for nothing if the index is a poor measure of the true state. We provide sufficient conditions for this effect to cause the borrower to choose a nonindexed contract instead.     

The design of bank loan contracts

The unique characteristics of bank loans emerge endogenouslyto enhance efficiency in a model of renegotiation between aborrower and a lender in which there is the potential for moralhazard on each side of the relationship. Firm risk is endogenousand renegotiated interest rates on the debt need not be monotonein firm risk. The initial terms of the debt are not set to pricedefault risk but rather are set to efficiently balance bargainingpower in later renegotiation. Loan pricing may be nonlinear,involving initial transfers either from the borrower to thebank or from the bank to the borrower.     

Evidence of jointness in the terms of relationship lending

This paper examines the impact of the borrower–lender relationship on the explicit loan interest rate and collateral, as well as the correlation between loan interest rates and collateral. Using a simultaneous equation approach, we find that collateral has a statistically significant positive impact of 200 to 400 basis points on loan interest rates. We find this positive association to be stronger for personal (or outside) collateral than collateral provided by the firm's assets (or inside collateral). Finally, we find the economic impact of the borrower–lender relationship to be 21 basis points for one standard deviation increase in relationship length.     

The economic role of foreclosures

We consider the economic consequences of changing the foreclosure rules. By incorporating renegotiation into the analysis, we show that although renegotiation decreases the number of foreclosures it can make the effects of foreclosure more significant. Even when foreclosure does not actually occur, a change in foreclosure rules changes the threat points of lender and borrower in any renegotiation, and thus changes the effective interest rate that the lender receives. In the long run, stated interest rates on loans will adjust to compensate for any change in the effective interest rate. We also examine the impact of a change in foreclosure laws on the borrower's welfare.     

Investment,agency conflicts,debt maturity,and loan guarantees by negotiation

We consider an irreversible investment, of which the sunk cost is financed by a finite-term debt after entering into an option-for-guarantee swap (OGS) with negotiation. The OGS is a three-party agreement among a lender (bank), an insurer, and a borrower (entrepreneur), where the bank lends at a given interest rate to the entrepreneur and if the borrower defaults on debt, the insurer must pay all the principal and remaining interests to the lender instead of the borrower. In return for the guarantee, the borrower must allocate a perpetual American call option to purchase a fraction (guarantee cost) of his equity at a given strike price. We find that the investment threshold decreases but the exercise threshold of the insurer’s option increases with the borrower’s bargaining power. Both the investment and exercise threshold increase with debt maturity, but there is a U-shaped relation between the guarantee cost and debt maturity. The borrower postpones investment once the funding gap or project risk increases. The swap may overcome the inefficiencies from asset substitution and debt overhang, strongly depending on the debt maturity and borrower’s bargaining power.     

Exclusion,competition, and regulation in the retail loan market

Exclusion of borrowers from credit markets became a primary concern for regulators during the recovery from the recent recession. The paper analyzes loan-making institutions that set both interest rates and minimum credit requirements. We propose analytical measures of the degree of borrower exclusion from receiving loans. We analyze five market structures: Single lender, regulated interest rate, entry, interest rate discrimination, and highly-competitive lenders. Interest rate regulation improves total welfare relative to a single lender market. However, entry of a second lender reduces exclusion and generates higher total welfare. In the absence of fixed costs, perfect and Bertrand competition are optimal.     

Does the quality of lender–borrower relationships affect small business access to debt? Evidence from Canada and implications in China

The literature on corporate governance and entrepreneurial finance suggests that when lender–borrower relationships are of longer duration, they tend to be more successful in solving the informational asymmetry problems related to small business debt financing. Using the data from Canadian financial markets, this study first confirms this finding, insofar as the quality of lender–borrower relations is affected by traditional solutions to agency conflicts, lender requirements, and negative changes in the borrowing terms offered by lenders. However, in testing this conclusion further, we empirically demonstrate that, counter-intuitively, the quality of the lender–borrower relationship does not affect a small firm's access to debt, or change the terms of borrowing. We also show similar supporting evidence from lenders to small firms in China, where business relationships involving “guanxi” (or connections that are beneficial for both parties) are commonly expected to influence access to debt. The robustness of the study's results is shown by the data from numerous lending institutions in a province of China.     

Market response to syndicated loan announcements from high-profile failed and acquiring banks during the global financial crisis

Previous studies that have examined the impact of the 2008 financial crisis on syndicated loans have ignored potential differences between lending banks by explicitly or implicitly aggregating all lenders together and focusing on borrower characteristics. One must jointly consider both borrower and lender to fully understand the complex role of the syndicate during this period. We consider the identity of the lender, with a focus on five major US banks that failed and their five corresponding acquirers. Our results highlight the distinct roles of investment and commercial banks and facilitate an understanding of relationship and transactional-based lending.     

Rare event risk and emerging market debt with heterogeneous beliefs

In a setting where the lender and the borrower have heterogeneous beliefs about the likelihood of a disastrous shock to the borrower's economy, we study the debt contract that defaults at the occurrence of that shock, as proposed by Barro (2006). We find that a higher belief by the lender compared to the borrower can lead to countercyclical interest rates and credit spreads in non-default times, and to an increase in the borrower's indebtedness in default times, as often observed in emerging market economies. When calibrating the model to prices in the credit default swap market, we show that heterogeneous beliefs can account for more than 40% of the variation in CDS spreads associated with shocks to the borrower's economy in non-default times.     

Have domestic or foreign factors driven European external imbalances?

This paper examines whether domestic or foreign net saving predominantly influences an economy’s international borrowing and lending with reference to the experience of western European economies that have had sizable current account surpluses and deficits since the turn of the century. It proposes that if an international lender country’s current account surplus is positively (negatively) related to its real long term interest rate, then foreign (domestic) factors are driving its external imbalance. On the contrary, for a foreign borrower country if its current account deficit is positively (negatively) related to its real long term interest rate, domestic (foreign) factors drive its external imbalance. On this basis, it shows econometrically for major European lender economies, Germany, the Netherlands, Switzerland and Sweden, that external imbalances this decade were mainly determined by foreign factors, though by domestic factors for Norway. For major borrower economies, Italy, Spain, Portugal, Ireland and the United Kingdom, the results were not significant implying that neither domestic nor foreign factors predominated over this time.     

担保型商品房买卖合同纠纷的裁判困境及其出路

为担保借款合同,当事人同步签署商品房买卖合同,约定借款人不能归还借款本金及利息时,应履行商品房买卖合同。此类具有担保功能的商品房买卖合同,在性质上属于债务清偿协议。法释\[2015\]18号第24条虽要求当事人以民间借贷提起诉讼,但未否定商品房买卖合同的效力。在确认应还本金及利息及借款人没有如期清偿的前提下,出借人请求移转房屋所有权的,应予支持。     

信息不对称下信贷市场的惜贷与挤出效应

通过收集和处理借贷平台日常运行中形成的真实数据,本文发现信息不对称条件下信贷市场逆向选择会导致市场萎缩的两类效应;其一为"惜贷"效应:随着信息不对称程度的加深,借贷双方最终达成的合约额度降低和交易匹配时间延长,市场的有效供给萎缩;其二为"挤出"效应:随着信息不对称程度的恶化,借贷双方合约的利率将会升高、期限缩短,市场的有效需求萎缩。通过完善人工智能、大数据和区块链等金融科技并加强银企关系,可以降低信息不对称,进而缓解逆向选择带来的上述不利影响。     

So what do I get? The bank's view of lending relationships

While many empirical studies document borrower benefits of lending relationships, less is known about lender benefits. A relationship lender's informational advantage over a non-relationship lender may generate a higher probability of selling information-sensitive products to its borrowers. Our results show that the probability of a relationship lender providing a future loan is 42%, while for a non-relationship lender, this probability is 3%. Consistent with theory, we find that borrowers with greater information asymmetries are significantly likely to obtain future loans from their relationship lenders. Relationship lenders are likely to be chosen to provide debt/equity underwriting services, but this effect is economically small.     

Optimal Stopping and Losses on Subprime Mortgages

Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and collateral characteristics, and local legal requirements, as well as traditional option variables in the decisions of borrowers and lenders. Although subprime borrowers default earlier, which should reduce lender losses, these borrowers, nevertheless, impose greater realized losses on mortgage lenders.     

The Role of Soft Information in a Dynamic Contract Setting: Evidence from the Home Equity Credit Market

Credit underwriting is a dynamic process involving multiple interactions between borrower and lender. During this process, lenders have the opportunity to obtain hard and soft information from the borrower. We analyze more than 108,000 home equity loans and lines‐of‐credit applications to study the role of soft and hard information during underwriting. Our data set allows us to distinguish lender actions that are based strictly on hard information from decisions that involve the collection of soft information. Our analysis confirms the importance of soft information and suggests that its use can be effective in reducing overall portfolio credit losses ex post.     

The role of lender country factors in cross border bank lending

This article considers the cross-border lending stock from 19 advanced countries to European countries using quarterly data for 1999–2016. An extended model based on home and host country characteristics conditioned on distance and mass primarily measured by GDP is used to explain the behaviour of cross-border lending stocks. We focus particularly on the competitive structure of domestic banking markets and on the role of EU integration using indicators from the New Industrial Economics literature. Our results suggest EU integration has had a large effect on cross-border lending, although this has been partly reversed after Euro debt crisis. This reversal probably arises more from the actions of home country bank regulators rather than from the rise in risk premia in host countries. We show that in general lender rather than borrower factors are more important, and that more concentrated or less competitive lender countries do more cross border lending, especially in less concentrated or more competitive borrowers. Our results are robust across a range of specifications.     

Mortgage Contracts,Strategic Options and Stochastic Collateral

This paper offers a game-theoretic model for both the analysis and valuation of mortgage contracts in the context of an economy with complete information and complete contingent claims markets. We analyze the equilibrium strategy of the lender, who holds an option over the magnitude of mortgage credit extended per dollar of collateral offered, and the mortgagor, who holds options to default or prepay, in a class of intertemporal mortgage contracts collateralized by property evolving according to a random process which is common knowledge to both parties to the mortgage contract. Using continuous–time arbitrage valuation principles, we derive the value of the mortgage contract to both parties and show, through both analytical solutions and numerical simulations, that Markov perfect equilibria exist in which, among other properties, a lower flow of housing services accruing to the borrower, per dollar of initial house value, and a correspondingly lower rate of effective depreciation, will elicit a larger volume of funds offered by a lender; the amount of credit offered, the values of the contract to both lender and mortgagor, and the expected losses to both parties from costly bankruptcy are highly sensitive to the perceived volatility of the value of the property collateralizing the mortgage, even in an economy with complete markets or risk neutrality on the parts of lender and borrower; the upper limit on mortgage credit offered by a rational lender may be a small fraction of the current fair market value of the property, regardless of the contractual yield offered by the borrower, and will decrease, at each such yield, as bankruptcy costs or housing service flows increase; and under significant but plausible values for bankruptcy and costs of liquidating property under foreclosure, the flow of mortgage credit can become negatively related to the spread of the mortgage yield over the riskless rate, with the lender preferring a lower contractual yield to a higher one.     

Credit Markets in Northern Nigeria: Credit as Insurance in a Rural Economy

This article addresses the issues of incomplete markets andimperfect information in the context of credit markets in ruralnorthern Nigeria. In much recent theoretical literature, theproblems of moral hazard and adverse selection are assumed tobe decisive for the organization of agrarian institutions. Incontrast, it is found that in the four villages surveyed credittransactions take advantage of the free flow of informationwithin rural communities. Information asymmetries between borrowerand lender are unimportant, and their institutional consequences—theuse of collateral and interlinked contracts—are absent.Credit transactions play a direct role in pooling risk betweenhouseholds through the use of contracts in which the repaymentowed by the borrower depends on the realization of random productionshocks by both the borrower and the lender.