Bank and Nonbank Lenders and the Commercial Mortgage Market

This paper develops an equilibrium model of the commercial mortgage market that includes the sequence from commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.     

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.     

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.     

Borrower Self-Selection,Underwriting Costs,and Subprime Mortgage Credit Supply

In the U.S., households participate in two very different types of credit markets. Personal lending is characterized by continuous risk-based pricing in which lenders offer households a continuous distribution of borrowing possibilities based on estimates of their creditworthiness. This contrasts sharply with mortgage markets where lenders specialize in specific risk categories of borrowers and mortgage supply is stepwise linear. The contrast between continuous lending for personal loans and discrete lending by specialized lenders for mortgage credit has led to concerns regarding the efficiency and equity of mortgage lending. This paper sheds both theoretical and empirical light on the differences in the two credit markets. The theory section demonstrates why, in a perfectly competitive credit market where all lenders have the same underwriting technology, mortgage credit supply curves are stepwise linear and lenders specialize in prime or subprime lending. The empirical section then provides evidence that borrowers are being effectively sorted based on risk characteristics by the market.     

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).     

Bank Lending to Native American Applicants: An Investigation of Mortgage Flows and Government Guarantee Programs on Native American Lands

We investigate the efficacy of government guarantee programs for mortgage loans made on tribal lands by comparing lending outcomes for White applicants and Native Americans (NAs) living on- and off reservation lands. Simultaneous equations models with the loan-to-income ratio endogenous indicate both on- and off-reservation NA applicants experience higher conditional denial rates compared with otherwise similar White applicants. NAs living on-reservation are equally as likely to be approved for mortgage loans as off-reservation NAs. On-reservation applicants self-select lower loan-to-income ratios, and are held to a higher standard for this credit variable, likely because lower housing values and other economic variables challenge on-reservation applicants. Our findings suggest lack of financial resources, lack of applicant education about and experience with the mortgage process, low creditworthiness, and lender reluctance to confront burdensome bureaucracy limit on-reservation guarantee program success.     

Disparities in Mortgage Lending,Bank Performance,Economic Influence,and Regulatory Oversight

This study investigates factors affecting changes in the disparity of home mortgage denial rates between white and minority loan applicants in the U.S. during the period 1991–1997. We develop a two-stage least-squares regression model that incorporates applicant-level characteristics, neighborhood characteristics, regional economic data, and bank-specific data as explanatory variables. Some have argued that mortgage lenders were under increasing pressure from industry regulators to extend additional credit to minorities and low-income groups during the period under study. The model includes each institution's periodic CRA rating as a proxy for regulatory influence. An alternative explanation is that market forces, such as improvements in economic conditions and in bank financial condition and performance, affected default loss estimates and credit standards in a way that disproportionally benefited minority and low-income applicants. The empirical findings are consistent with the latter hypothesis. We conclude that policy makers should consider the impact of market factors when assessing the allocation of mortgage credit in a particular demographic market. The findings also underscore the importance of controlling for lender assessments of credit risk when evaluating compliance with CRA and fair lending statutes.     

The cultural affinity hypothesis and mortgage lending decisions

This paper conducts an empirical analysis of the cultural affinity hypothesis put forth by Calomiris, et al. (1994) in the mortgage lending market. This hypothesis implies that white loan officers, because of a lack of familiarity with minority applicants, will rely more heavily on characteristics that can be observed at low cost (e.g., objective loan application measures) in evaluating the creditworthiness of minority applicants relative to white applicants. Using a cleansed sample of 1,991 loan applications drawn from data collected by the Federal Reserve Bank of Boston, the results of the analysis were consistent with the cultural affinity hypothesis. In particular, we found that marginal black and Hispanic applicants appeared to be held to higher quantitative standards on such objective factors as credit history and debt obligation ratios than were similarly situated marginal white applicants.     

House Price Markups and Mortgage Defaults

The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, matching, and search costs, generating what we term “markups” above or below the average market price. We measure markups for 3.4 million purchase-money mortgages and show that they can predict mortgage defaults and credit losses conditional on default even after accounting for collateral coverage (loan-to-value ratio) and a comprehensive set of other covariates. The findings suggest that standard collateral coverage estimation may be inaccurate, with implications for both individual and portfolio-level credit risk assessment.     

“次级债风波”的影响为何是“重量级”的？

消费者信贷挑战金融行业的竞争并加快金融创新,次级债是金融机构在追逐利润前提下的资产证券化产物,然而资产证券化放大金融风险。有效性冲突是现代金融风险的一个新特征,它挑战现有金融监管方式,金融监管不能适应创新需要使得次级债风波重创美国金融市场。     

美国次级住房抵押贷款危机的原因及影响

需求大于供给导致美国次级住房抵押贷款快速增长,"贷款—分散"模式链条上各主体的收益激励结构和次级贷款品种设计导致的次级债市场扭曲繁荣,进而导致次级债危机。次级债危机将在较长的时间里困扰美国经济,但是从次级贷款支持证券及其衍生产品的分档设计可以预测该市场的绝大部分投资者不会因次级债危机而受到损失。     

The income elasticity of mortgage loan demand

One explanation for the emergence of the housing market bubble and the subprime crisis is that increases in individuals’ income led to higher increases in the amount of mortgage loans demanded, especially for the middle class. This hypothesis translates to an increase in the income elasticity of mortgage loan demand before 2007. Using applicant‐level data, we test this hypothesis and find that the income elasticity of mortgage loan demand in fact declines in the years before 2007, especially for the mid‐ and lower‐middle income groups. Our finding implies that increases in house prices were not matched by increases in loan applicants’ income.     

Mortgage credit availability in low- and moderate-income minority neighborhoods: Are information externalities critical?

This study conducts a cross-sectional analysis of U.S. metropolitan counties to inquire into the factors affecting white and minority mortgage loan approval rates during 1990–1991. In particular, evidence is sought on whether minority loan applicants are denied credit more frequently than white applicants because of information externalities. Within each county, all predominantly minority, low- or moderate-income census tracts are groupted together, and then regression equations are estimated across counties and tract groupings. Separate approval rate equations are estimated for conventional and federally insured (FHA or VA) home purchase loans. In addition, a regression equation for the percentage of applicants applying for federally insured loans is estimated.Both approval rate regressions indicate that across white tract groupings, the depth of the housing market (the number of sales of owner-occupied units during 1989) has a positive and statistically significant effect on the loan approval rate, consistent with the view that information externalities affect mortgage loan evaluations. However, this relationship appears not to hold across minority tract groupings.     

Looking Beyond Credit Ratings: Factors Investors Consider In Pricing European Asset‐Backed Securities

In this paper, we empirically investigate what credit factors investors rely upon when pricing the spread at issue for European asset‐backed securities. More specifically, we investigate how credit factors affect new issuance spreads after taking into account credit rating. We do so by investigating primary market spreads for tranches of non‐mortgage‐related asset‐backed securities issued from 1999 to the year prior to the subprime mortgage crisis, 2007. We find that although credit ratings play a major role in determining spreads, investors appear to not rely exclusively on these ratings. Our findings strongly suggest that investors do not ignore other credit factors beyond the assigned credit rating.     

Regulation of Subprime Mortgage Products: An Analysis of North Carolina's Predatory Lending Law

This paper estimates the effect of North Carolina's high-cost mortgage law on the subprime mortgage market in that state. The results indicate that creditors sharply restricted lending to higher risk consumers in North Carolina following passage of the law. Creditors did not restrict lending in neighboring states or to lower risk consumers in North Carolina. These results suggest that the restriction in North Carolina was due to rationing in response to higher costs imposed by the law. The findings of this study are of importance beyond North Carolina. Other states and municipalities have proposed or passed similar or more restrictive laws. These laws risk taking back some of the gains in credit availability that lower income and higher risk consumers gained in the 1990s.     

A comparative study of the probability of default for global financial firms

This article presents a modification of Merton’s (1976) ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis period. We compare the performance of the implied probability of default from our model to the expected default frequencies based on the Moody’s KMV model and agency credit ratings by constructing cumulative accuracy profiles (CAP) and the receiver operating characteristic (ROC). We find that the probability of default estimates from our model are equal or superior to other credit risk measures studied based on CAP and ROC. In particular, during the subprime crisis our model surpassed credit ratings and matched or exceeded KMV in anticipating the magnitude of the crisis. We have also found some initial evidence that adding off-balance-sheet derivatives exposure improves the performance of the KMV model.     

Subprime mortgage funding and liquidity risk

In this article, we use actuarial methods to solve a nonlinear stochastic optimal liquidity risk management problem for subprime originators with deposit inflow rates and marketable securities allocation as controls. The main objective is to minimize liquidity risk in the form of funding and credit crunch risk in an incomplete market. In order to accomplish this, we construct a stochastic model that incorporates originator mortgage and deposit reference processes. Finally, numerical examples that illustrate the main modeling and optimization features of the article are provided.     

The impact of securitization on the expansion of subprime credit

This paper investigates the relationship between securitization activity and the extension of subprime credit. The analysis is motivated by two sets of compelling empirical facts. First, the origination of subprime mortgages exploded between the years 2003 and 2005. Second, the securitization of subprime loans increased substantially over the same time period, driven primarily by the five largest independent broker/dealer investment banks. We argue that the relative shift in the securitization activity of investment banks was driven by forces exogenous to factors impacting lending decisions in the primary mortgage market and resulted in lower ZIP code denial rates, higher subprime origination rates, and higher subsequent default rates. Consistent with recent findings in the literature, we provide evidence that the increased securitization activity of investment banks reduced lenders' incentives to carefully screen borrowers.     

Villains or scapegoats? The role of subprime borrowers in driving the U.S. housing boom

An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002-2006 U.S. house price boom. By contrast, this paper documents a robust, negative correlation between the growth in the share of purchase mortgages to subprime borrowers and house price appreciation at the county-level during this time. Using two different instrumental variables approaches, we also establish causal evidence that house price appreciation lowered the share of purchase loans to subprime borrowers. Further analysis using micro-level credit bureau data shows that higher house price appreciation reduced the transition rate into first-time homeownership for subprime individuals. Finally, the paper documents that subprime borrowers did not play a significant role in the increased speculative activity and underwriting fraud that the literature has linked directly to the housing boom. Taken together, these results are more consistent with subprime borrowers being priced out of housing boom markets rather than inflating prices in those markets.     

A model of mortgage losses and its applications for macroprudential instruments

We develop a theoretical model of mortgage loss rates that evaluates their main underlying risk factors. Following the model, loss rates are positively influenced by the house price level, the loan-to-value of mortgages, interest rates, and the unemployment rate. They are negatively influenced by the growth of house prices and the income level. The calibration of the model for the US and Switzerland demonstrates that it is able to describe the overall development of actual mortgage loss rates. In addition, we show potential applications of the model for different macroprudential instruments: stress tests, countercyclical buffer, and setting risk weights for mortgages with different loan-to-value and loan-to-income ratios.