Price Expectations,Distressed Mortgage Markets and the Housing Wealth Effect

Using a unique combination of regulatory and survey microdata, we examine the importance of the life cycle theory of consumption in estimating housing wealth effects for the Irish mortgage market. Since the recent financial crisis, this market has experienced substantial house price declines and negative equity. Thus, house price expectations are likely to be important in influencing housing wealth effects. We find a positive correlation between consumption and changes in housing wealth among our sample of mortgaged Irish households. Furthermore, we find that this positive association only exists when housing wealth changes are perceived to be of a permanent nature.     

Mortgage Markets and Inter-Regional Differences in Conventional Mortgage Terms

One of the purposes of the secondary mortgage market is to move funds from areas of capital surplus to areas of capital shortage. If mortgage funds move freely throughout the economy then the price of mortgage funds (the terms of the mortgage) should be the same everywhere. Thus, if the secondary mortgage market is efficient, mortgage terms should show less geographic variation after the secondary market began in 1970 than they showed before. In this paper, the efficiency of the market is tested in two stages. In the first, the average terms of mortgage loans in 1968 and 1978 are examined to determine whether they became more homogeneous after the secondary market was begun. In the second stage, the terms are modeled as a function of region, year by region interaction variables, foreclosure rates, the usury ceiling and the average cost of funds. This model is estimated and analyzed using a multivariate multiple regression technique.     

Mortgage Default in Local Markets

Using recent theoretical advances and an extensive panel data set on metropolitan areas, this study provides new tests of the contingent claims based model of default. The empirical modeling incorporates a full complement of variables that permit direct tests of the options-based model including the conditional effects of age and rent-to-price ratios. The role of transaction costs and trigger events is examined, and the results confirm the importance of both. The effects of aggregation and short sample periods are explored and demonstrated to affect inference in studies of mortgage default.     

Lender Steering in Residential Mortgage Markets

In this article, we examine the incentives for lenders to steer borrowers into piggyback loan structures to circumvent regulations requiring primary mortgage insurance (PMI) for loans with loan‐to‐value ratios (LTV) above 80%. Our empirical analysis focuses on propensity score‐matched portfolios of piggyback and single‐lien loans having the same combined LTV based on a full set of observed risk characteristics. Our results confirm that mortgages originated with the piggyback structure have much lower ex post default rates and faster prepayment speeds than corresponding PMI loans. We also find a significant causal effect of interstate banking deregulation on the growth of piggybacks in these years, confirming that the ex post performance gap is primarily driven by lender steering on the supply side and not by borrower self‐selection. We then perform a number of tests to explore different origination and execution channels of mortgage steering.     

The Integration of Mortgage Markets and Capital Markets

In this paper, we develop a model to predict the impact of deregulation in the form of relaxing interest rate control on the integration between the mortgage credit market and the general credit market. The model is tested through the examination of the long-term Granger-like equilibrium relationship between mortgage interest rates and general interest rates in the pre-1980 regulated vs. the post-1980 deregulated periods. It is shown that the level of regulation, in the form of targeting general interest rate levels, contributes to the segmentation of the mortgage market from the capital market. To test this model, we compare the relationship between mortgage interest rates and general interest rates around 1980 where major control on interest rate levels in capital markets was lifted. Using Engle and Granger's procedure to overcome the estimation problem from nonstationarity in the interest rate series, we are able to find that the two interest rates were cointegrated after 1980 but not before. More importantly, it appears that the two markets were already integrated before the full development of the secondary mortgage markets between 1984 and 1987. Therefore, we conclude that the bulk of the integration between the mortgage and capital markets was completed as a result of the removal of interest rate controls around 1980, in contrast with previous studies that find integration occurred during the mid-1980s primarily as a result of the rapid development of the secondary mortgage markets.     

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.     

Search Cost and Price Dispersion in Vertically Related Markets: The Case of Bank Loans and Deposits

Using data on marginal interest rates of loan and deposit products by Spanish banks, we find that the level of interest rates on loans (deposits) across geographic markets decrease (increase) with the number of banks in each market, and that the level of interest rates on loans increases with the level of interest rates of deposits. We also find that the dispersion of interest rates of both loans and deposits increase with the number of banks. This evidence is interpreted as evidence of customer’s search costs in retail banking, consistent with predictions from the Carlson and McAfee (J Polit Econ 91:480–493, 1983) model of market competition with search costs.     

Residential Mortgage Markets: Current Developments and Future Prospects

Historical developments as well as current innovations have generated significant changes in the structure and operation of the residential mortgage market. General economic stability, a low inflation rate, growth of savings and loan associations, and strong consumer demand marked the fifteen-year period immediately following World War II. In contrast, the decade of the sixties was characterized by increased competition in the mortgage market, a series of credit crunches, and increased governmental activity. In reaction to these and related developments, current innovations affecting the mortgage market focus on design of new mortgage instruments, improvements in market efficiency, and reform of financial institutions. If history is a guide, it suggests that the residential mortgage market responds flexibly to adverse conditions.     

Introduction to Special Issue: Government Involvement in Residential Mortgage Markets

The Federal Reserve Bank of Atlanta's Center for Real Estate Analytics and the University of North Carolina at Charlotte's Center for Real Estate jointly sponsored a research conference held in Charlotte on December 5–6, 2013. The conference theme was “Government Involvement in Residential Mortgage Markets” and included papers and discussions from an array of economists employed in academia, government, think tanks and the private sector. This special issue of Real Estate Economics is composed of seven of the ten papers presented at the conference. The research is concentrated on the recent U.S. housing boom and bust, with a particular focus on the role of government policy.     

An Indirect Test for Differential Treatment of Borrowers in Mortgage Markets

The indirect test implemented in this paper is based on the economics of discrimination which hypothesizes that differential treatment of borrowers, on the basis of age, race, sex, or property location, at any stage of the mortgage transaction, including prescreening, results in segregation of those getting less favorable treatment. Borrowers who perceive that they are receiving less favorable treatment based on age, race, sex, or property location would be segregated into the FHA-in-sured sector. Estimates of an FHA participation equation show no evidence of such segregation by sex, race, or center city property location. Younger borrowers do appear to be differentially concentrated in the FHA programs.     

The Price Effects of Cash versus Mortgage Transactions

This paper investigates the price effects of cash versus mortgage transactions. Our hypothesis that home sales involving all-cash transactions will sell at discount is borne out by the results of this study. Analyzing a sample of comparable row home dwelling units, we find that all-cash transactions are associated with roughly a 13% price discount relative to transactions involving financing terms that are typical of the market. Cash is King. The findings are consistent with theories regarding buyer—seller behavior.     

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.     

Price Discovery in American and British Property Markets

This paper examines the securitized (public) and unsecuritized (private) commercial property markets in the United States and the United Kingdom for evidence of price discovery. Appraisal-based returns are corrected for smoothing, without presupposing the true returns to be uncorrelated or unpredictable across time. Real Estate Investment Trusts (REITs) and property company returns are corrected for leverage. We find evidence that price discovery occurs in the securitized market structure in both countries, and that this price information does not fully transmit to the unsecuritized markets for a year or more. In Britain, the unsecuritized market appears to be more closely and immediately linked to the securitized market than is the case in the U.S.     

Managing Mortgage Interest-Rate Risks in Forward, Futures, and Options Markets

This article reviews the Housing Commission's perspective and recommendations on management of interest-rate risks in housing finance, and considers the relative advantages of various techniques by which institutions on the supply side of mortgage markets can absorb or shift such risks. It is argued that exchange-based options can provide a more reliable way than cash forward contracting for originators or purchasers of mortgages to manage commitment-period risk, but that commitment fees charged household borrowers should not fully correspond to premiums for put options "traded" on the exchanges. It also is argued that exchange-based futures can provide a more effective and economical way than asset-liability maturity matching in cash markets for thrift institutions to manage portfolio interest-rate risks; in particular, futures trading can permit these institution to meet the maturity preferences of liquidity-conscious creditors and risk-averse borrowers, to reduce the risk associated with unexpected shifts of the yield curve, and to maintain a higher degree of asset quality. The capacity of futures markets to handle large-scale hedging by mortgage market participants will depend upon heavy participation by highly leveraged speculators who are willing to take long positions without the receipt of substantial risk premiums from hedgers.     

Monopoly Rents and Price Fixing in Betting Markets

Betting markets provide an ideal environment in which to examinemonopoly power due to the availability of detailed information on product pricing. In this paper we argue that the pricing strategies of companies in the U.K. betting industry are likely to be an important source of monopoly rents, particularly in the market for forecast bets. Pricing in these markets are shown to be explicitly coordinated. Further, price information is asymmetrically biased in favor of producers. We find evidence, based on U.K. data, that pricing of CSF bets is characterized by a significantly higher markup than pricing of single bets. Although this differential can in part be explained by the preferences of bettors, it is reasonable to attribute a significant part of the differential as being due to monopoly power.     

Major Developments in Residential Mortgage and Housing Markets Since the Hunt Commission

A number of important changes have been made to the mortgage finance system since the Hunt Commission filed its report, and the economic environment has been altered substantially. This paper examines shifts in the relative importance of public and private institutions in the residential mortgage markets during the past decade, within the context of Hunt Commission recommendations. Changes in the cyclical sensitivity of mortgage and housing activity, and the implications of rapid inflation for the growth of these markets, also are considered.     

Housing Price Dynamics,Mortgage Credit and Reverse Mortgage Demand: Theory and Empirical Evidence

This article presents some theoretical and empirical approaches for identifying interactions among fundamental economic variables that determine housing prices. Using home equity conversion mortgage (HECM) loan‐level data, this study quantifies the major risks of reverse mortgages and shows that higher housing prices induce higher demand for reverse mortgages among elderly homeowners. Senior citizens rationally hold pessimistic expectations about future housing price appreciation and lock in their home‐equity gains by obtaining reverse mortgages, which in turn led to the substantial HECM growth prior to the financial crisis of 2008. A novel simulation also forecasts HECM loans under various economic scenarios. From a mortgage credit perspective, these findings generate several policy implications for the implementation of “HECM 3.0.”     

Airline Market Power and Intertemporal Price Dispersion

This paper analyzes the empirical relationship between market structure and price dispersion in the airline markets connecting the U.K. and the Republic of Ireland. Price dispersion is measured by the Gini coefficient, calculated using fares posted on the Internet at specific days before takeoff. We control for passengers' heterogeneity in their purpose of travel, as well as for such peak periods as Christmas and Easter. Our finding of a negative correlation between competition and price dispersion suggests that competition is likely to hinder the airlines' ability to price discriminate, although this effect appears to be lessened in peak periods.     

Mortgage Brokers,Origination Fees,Price Transparency and Competition

This article examines the dynamics between mortgage broker competition, origination fees and price transparency. A reverse first‐price sealed‐bid auction model is used to motivate broker pricing behavior. Confirming the model predictions, our empirical analysis shows that increased mortgage brokerage competition at the Metropolitan Statistical Area level leads to lower fees. The findings are robust to different measures of fees as well as different measures of competition. We also provide evidence that broker competition reduces mortgage origination fees on retail (nonbrokered) loans as well. In addition, our results indicate that pricing complexity is an important determinant of fees, and increased broker competition is associated with a higher probability of a loan being priced with transparency. Our results suggest that mortgage brokers increase competition and lower fees in the mortgage market.