The closing rate on residential mortgage commitments: An econometric analysis

Mortgage lenders routinely guarantee rates and points for periods of 60 days or more and hedge the inherent interest rate risk by selling the proportion of mortgages expected to close in forward markets. This article presents a model of the decision to close on the mortgage and demonstrates that the estimates of the model increase the precision of closing rate forecasts. The analysis indicates that changes in mortgage rates are important determinants of the closing rate for fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM). Other important factors include whether the mortgage is for a new purchase, for owner occupancy, and for a single-family house, and what the overall level of mortgage rates and the loan-to-value ratio are and whether the rate guarantee was granted at the application date or later.     

Mortgage Loan Securitization and Relative Loan Performance

We compare the ex ante observable risk characteristics, the default performance, and the pricing of securitized mortgage loans to mortgage loans retained by the original lender. In our sample of loans originated between 2000 and 2007, we find that privately securitized fixed and adjustable-rate mortgages were riskier ex ante than lender-retained loans or loans securitized through the government sponsored agencies. We do not find any evidence of differential loan performance for privately securitized fixed-rate mortgages. We find evidence that privately securitized adjustable-rate mortgages performed worse than retained mortgages, although other observable factors appear to be more economically important determinants of mortgage default. We do not find any evidence of a compensating premium in the loan rates for privately securitized adjustable-rate mortgages.     

GSEs,Mortgage Rates,and the Long-Run Effects of Mortgage Securitization

Our paper compares mortgage securitization undertaken by government-sponsored enterprises (GSEs) with that undertaken by private firms, with an emphasis on how each type of mortgage securitization affects mortgage rates. We build a model illustrating that market structure, government sponsorship, and the characteristics of the mortgages securitized are all important determinants of mortgage rates. We find that GSEs generally—but not always—lower mortgage rates, particularly when the GSEs behave competitively, because the GSEs implicit government backing allows them to sell securities without the credit enhancements needed in the private sector. Using our simulation model, we demonstrate that when mortgages eligible for purchase by the GSEs have characteristics similar to other mortgages, the GSEs implicit government-backing generates differences in mortgage rates similar to those currently observed in the mortgage market (which range between zero and fifty basis points). However, if the mortgages purchased by GSEs are less costly to originate and securitize, and if the GSEs behave competitively, then the simulated spread in mortgage rates can be much larger than that observed in the data.     

以地融资、地方债务与杠杆——地方融资平台的土地抵押分析

中国的高经济杠杆率和地方债务风险受到广泛关注,目前较少研究地方债务中的银行贷款,而地方融资平台的土地抵押贷款是其中重要的融资来源。本文首次利用爬虫工具获取了中国土地市场网上的土地抵押数据,并且搜集了地方融资平台名单,通过对比融资平台和非平台公司的土地抵押信息,发现地方融资平台在抵押金额和抵押率上,都显著高于非融资平台的土地抵押。我们进行了各种稳健性检验,通过采用PSM方法,降低样本选择偏误,发现结果是稳健的。此外,本文还探究了背后的政治经济学因素,发现中西部的抵押金额和抵押率显著高于东部;未到期的城投债存量越大,土地抵押越大;地方政府的经济增长压力越大,土地抵押也越大。这一定程度上意味着,融资平台获得的土地抵押较高,是出于地方政府强烈的举债动机和对信贷市场的干预,导致信贷资源的无效率配置。即使是土地抵押这种相对来说风险较小的融资渠道,依然可能蕴含着地方债务风险,这也为地方债务融资的抵押率高提供了证据。     

Putting the squeeze on a market for lemons: Government-sponsored mortgage securitization

Lenders either sell or obtain insurance for many of the mortgages they originate to reduce credit risk and enhance liquidity. An overwhelming majority of the mortgages sold are purchased by government-sponsored enterprises. The prevailing view is that government-sponsorship of mortgage securitization causes mortgage rates to be lower than they would otherwise be. Using a model that incorporates asymmetric information and adverse selection, we provide an example in which government-sponsored mortgage securitization raises the mortgage rate.The analysis and conclusions set forth are our own and do not indicate concurrence by members of the Federal Reserve Research stafls, by the Board of Governors, or by the Federal Reserve Banks. We wish to thank Mark Fisher for his Mathematica expertise. All errors are ours exclusively.     

The Economic Effects of Legal Restrictions on High-Cost Mortgages

We analyze the effects of state predatory mortgage lending laws, which have been a model for recent changes in the United States federal legislation enacted to regulate the mortgage contract terms common in higher-risk mortgage market segments. Using the Rothschild-Stiglitz approach to model credit markets under asymmetric information, legal restrictions are shown to reduce the use and attractiveness of mortgage credit. Consistent with model predictions, empirical results indicate that originations of regulated high-cost mortgages were significantly less than predicted in states with more restrictive laws. The differences between predicted and actual originations of high-cost mortgages in states with less restrictive laws were not significant. These differences were also not significant for non-high-cost originations across all states. Thus, credit regulation was differentially associated with reduction in originations of high-cost mortgages, and non-high-cost lending did not consistently expand in areas where high-cost mortgages were restricted.     

Originators,wholesalers, and conduits: The marginal value of the contract rate on 30-year conventional mortgages

The model we present solves for the value of an incremental change in the mortgage contract given an expectation about the time the mortgage will be outstanding and a required return for this time span. The marginal value participants in the primary mortgage market place on the contract rate of a 30-year conventional mortgage determines the array of bids for new mortgage production. Mortgagors can issue mortgages at various discounts. High discounts are associated with low contract rates, and low discounts are associated with high contract rates. This article examines the way wholesale dealers and conduits value the various contract rates associated with current production of 30-year conventional mortgages.     

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.     

Credit History and the Performance of Prime and Nonprime Mortgages

Although nonprime lending has experienced steady or even explosive growth over the last decade very little is known about the performance characteristics of these mortgages. Using data from national secondary market institutions, this paper estimates a competing risks proportional hazard model, which includes unobserved heterogeneity. The analysis examines the performance of 30-year fixed rate owner occupied home purchase mortgages from February 1995 to the end of 1999 and compares nonprime and prime loan default and prepayment behavior. Nonprime loans are identified by mortgage interest rates that are substantially higher than the prevailing prime rate. Results indicate that nonprime mortgages differ significantly from prime mortgages: they have different risk characteristics at origination; they default at elevated levels; and they respond differently to the incentives to prepay and default. For instance, nonprime mortgages are less responsive to how much the option to call the mortgage or refinance is in the money and this effect is magnified for mortgages with low credit scores. Tests also reveal that default rates are less responsive to homeowner equity when credit scores are included in the specification.     

Effects of Bankruptcy Exemptions and Foreclosure Laws on Mortgage Default and Foreclosure Rates

This study analyzes the effects of state bankruptcy asset exemptions and foreclosure laws on mortgage default and foreclosure rates across different segments of the mortgage market. We found that the effects of these legal provisions are larger for subprime than for prime mortgages and larger for adjustable rate mortgages than for fixed rate mortgages. These results demonstrate that the effect of variation in bankruptcy exemptions and foreclosure laws is most pronounced in the most risky segments of the mortgage market, which are those that have been most affected by the continuing housing slump in the United States.     

The rise of risk-based pricing of mortgage interest rates in Italy

This paper assesses how much mortgage interest rates in Italy are priced on credit risk as proxied by the probability of household mortgage delinquency estimated using the EU-Silc database. Owing to data availability, we restrict the analysis of mortgage pricing to Italian households. Consistent with the more widespread use of credit scoring, estimates indicate that Italian lenders have increasingly priced mortgage interest rates on household credit risk. For mortgages granted between 2000 and 2007, we find that a 1% point increase in the probability of default is associated with a 21 basis point rise in mortgage interest rates, lower than the 38 basis point premium Edelberg (2006) estimated for the US at the end of the 1990s.     

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.     

Mortgage risks,debt literacy and financial advice

A limited understanding of mortgage contracts and the risks involved may have contributed to the outbreak of the 2007–2008 financial crisis. We developed a special questionnaire relating mortgage loan decisions to financial knowledge and financial advice. Our results demonstrate that homeowners appear to be well aware of mortgage risks. Large loans relative to home value are perceived as riskier, as are loans with large mortgage payments relative to income and loans linked to investment vehicles. Homeowners with riskier mortgages indicated that they could encounter financial problems should house prices or their income decline. Homeowners with relatively low debt literacy are more likely to take out traditional mortgages with principal repayments over the maturity of the loan. Riskier mortgages are more prevalent among homeowners with a better understanding of loan contracts. Financially less sophisticated homeowners consulting mortgage brokers, too, hold riskier mortgages.     

Characteristics of Mortgage Terminations: an Analysis of a Loan-Level Dataset

Understanding mortgage termination behavior is crucial for valuating mortgage-backed securities. Analyzing a unique loan-level dataset, this study examines the characteristics of mortgage prepayment and default behaviors in the Korean housing and housing finance markets. We also analyze mortgage termination behaviors across regions, loan purposes, and periods. The results suggest that the prepayment rate of fixed-rate mortgages (FRMs) and the ratio of adjustable-rate mortgages to FRMs can provide meaningful signals for the Korean household economy. Although the macro-prudential policies pertaining to the loan-to-value ratio (LTV) and debt-to-income ratio (DTI) are very effective, their effects can vary depending on the region or loan purpose. Furthermore, the DTI and credit score cannot always identify the default risks of mortgages not intended for housing purchases even though such mortgages are more vulnerable to macroeconomic changes. The observed changes in default behavior indicate that the government’s policies to promote fixed-rate loans have achieved a certain degree of success.     

Do Women Pay More for Mortgages?

This paper documents women on average pay more for mortgages than men. The disparity cannot be fully explained by traditional variables such as mortgage features, borrower characteristics, and market conditions. While the persistence of gender disparity may suggest discrimination, we offer a different explanation: women pay higher rates because they are more likely to choose lenders by recommendation while men tend to search for the lowest rate. Our empirical test confirms that search effort is rewarded in marketplace, and suggests that gender disparity in mortgage rates may be addressed by policies aimed at improving women’s financial literacy and search skills.     

Systematic mistakes in the mortgage market and lack of financial sophistication

Institutions often offer a menu of contracts to consumers in an attempt to create a separating equilibrium that reveals borrower types and provides better pricing. We test the effectiveness of a specific set of contracts in the mortgage market: mortgage points. Points allow borrowers to exchange an upfront amount for a decrease in the mortgage rate. We document that, on average, points takers lose about $700. Also, points takers are less financially savvy (less educated, older), and they make mistakes on other dimensions (e.g., inefficiently refinancing their mortgages). Overall, our results show that borrowers overestimate how long they will stay with the mortgage.     

The role of prepayment penalties in mortgage loans

We study the effect of mortgage prepayment penalties on borrowers’ prepayments and delinquencies by exploiting a 2007 reform in Italy that reduced penalties on outstanding mortgages and banned penalties on newly-issued mortgages. Using a unique dataset of mortgages issued by a large Italian lender, we provide evidence that: 1) before the reform, mortgages issued to riskier borrowers included larger penalties; 2) higher prepayment penalties decreased borrowers’ prepayments; and 3) higher prepayment penalties did not affect borrowers’ delinquencies. Moreover, we find suggestive evidence that prepayment penalties affected mortgage pricing, as well as prepayments and delinquencies through borrowers’ mortgage selection at origination, most notably for riskier borrowers.     

Housing-Price Cycles and Prepayment Rates of U.S. Mortgage Pools

Empirical mortgage prepayment models generally have trouble explaining differences in mortgage-prepayment speeds among pools with similar interest rates on the underlying mortgages. In this article, we model some of the sources of termination heterogeneity across mortgage pools, particularly the role of regional variations in housing prices in generating atypical prepayment speeds. Using a sample of Freddie Mac mortgage pools from 1991 to 1998, we compare two classes of empirical models: a rational option-pricing model using a backward-solving pricing algorithm and an empirical hazard model. In both empirical estimation strategies, we find evidence that differences in house-price dynamics across regions are an important source of between-pool heterogeneity. This finding is then shown to be robust to alternative ways of parameterizing pool heterogeneity in mortgage termination models.     

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

We examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA-RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID-affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.     

Pricing fixed rate mortgages: Some empirical evidence

We develop a simple model based on the hypothesis that yields in the secondary mortgage market provide a basis for pricing new loans in the primary mortgage market. The model is then expanded to include potential interest rate variations due to lender characteristics and whether the loans meet securitization requirements. The empirical results, using a two-year sample of single-family mortgage rates, conform to the predictions of the model. In particular, we find that the interest rates on FRMs in the primary market move in a one-to-one relationship with secondary market yields. We also find significantly lower interest rates on these mortgages that can be sold in the secondary market versus those that cannot, thus indicating the value of the ability to securitize mortgages.