Did Affordable Housing Legislation Contribute to the Subprime Securities Boom?

We use a regression discontinuity approach and present new institutional evidence to investigate whether affordable housing policies influenced the market for securitized subprime mortgages. We use merged loan‐level data on nonprime mortgages with individual‐ and neighborhood‐level data for California and Florida. We find no evidence that lenders increased subprime originations or altered loan pricing around the discrete eligibility cutoffs for the Government‐Sponsored Enterprises' (GSEs) affordable housing goals or the Community Reinvestment Act. Although we find evidence that the GSEs bought significant quantities of subprime securities, our results indicate that these purchases were not directly related to affordable housing mandates.     

Do CRA Agreements Influence Lending Patterns?

This article considers the broader impact of Community Reinvestment Act (CRA) agreements—bank pledges to extend a certain volume of lending to targeted groups and communities—by examining whether they are associated with changes in lending to lower–income and minority communities in the markets where they are initiated. We find the number of newly initiated CRA agreements in a county to be associated with significant increases in CRA, minority and overall conventional mortgage lending in a county over a three–year period. The results are consistent with the view that the increases in lending represent new lending, with some evidence suggesting that the increases in lending are relatively short–lived. Overall, the results are consistent with the notion that lenders view CRA agreements as a form of insurance against the potentially large and unknown costs associated with fair lending violations, poor CRA performance ratings and adverse publicity from CRA–related protests of mergers or other applications. The results are also consistent with the view that the effectiveness of CRA agreements in increasing lending activity is ultimately determined by the persistence and sophistication of community groups in monitoring compliance with CRA agreements.     

The Government‐Sponsored Enterprises and the Mortgage Crisis: The Role of the Affordable Housing Goals

I use regression discontinuity analysis to measure the effect of one of the Affordable Housing Goals, the Underserved Areas Goal (UAG), on the number of whole single‐family mortgages purchased by Fannie Mae and Freddie Mac (GSEs) in undeserved census tracts for 1996–2002. Focusing additionally on tracts that became UAG‐eligible in 2005–2006, I measure the effect of the UAG during peak years for the subprime market. The results suggest a small UAG effect and challenge the view that the goals caused the GSEs to supply substantially more credit to high‐risk borrowers than they otherwise would have supplied during the subprime boom.     

The Termination of Subprime Hybrid and Fixed‐Rate Mortgages

Adjustable‐rate and hybrid loans have been a larger component of subprime mortgage lending in the mortgage market than prime lending. The typical adjustable‐rate loan in subprime is a hybrid of fixed and adjustable characteristics in which the first 2 years are fixed and the remaining 28 years adjustable. Hybrid loans terminate at elevated probabilities even before the first adjustment date. Hybrid loan terminations are sensitive to interest rates and teaser rates (payment shocks). Default probabilities increase dramatically when payment shocks are mixed with low or no equity in the home. This is the mixture of events that helped to trigger the 2007/2008 subprime mortgage crisis.     

Platform Mispricing and Lender Learning in Peer-to-Peer Lending

Review of Industrial Organization - We document how online lenders exploit a flawed, new pricing mechanism in a peer-to-peer lending platform: Prosper.com. Switching from auctions to a posted-price...     

A Model of Localized Mortgage Lending Behavior*

Loan administration costs and the costs of search for information about risk are found to be determinants of spatial interest rate differentials. These costs are independent of dollar loan size; therefore, rational lending policies can produce higher interest rates (or lower term to maturity) in low-income communities. But the premium (lower maturity) should be related to lower loan size and risk differentials. Public policy should be directed toward compiling and verifying an information bank which would allow lenders to search efficiently for information about risk. An empirical methodology designed to test for mortgage deficiency in minority areas was developed through case studies. This indicated the utility of specifying the supply and demand for mortgages at the neighborhood level of aggregation. Trends in neighborhood property values were identified as important and overlooked measures of lending risk. Further exploration of the hypothesis that Spanish-speaking areas are mortgage deficient is suggested by the cases.     

Subprime Lending and Real Estate Prices

This article establishes a theoretical and empirical link between the use of aggressive mortgage lending instruments, such as interest‐only, negative‐amortization or subprime mortgages, and the underlying house prices. Such instruments, which come into existence through innovation or financial deregulation, allow more borrowing than otherwise would occur in previously affordability‐constrained markets. Within the context of a model with an endogenous rent‐buy decision, we demonstrate that the supply of aggressive lending instruments temporarily increases the asset prices in the underlying market because agents find it more attractive to own or because their borrowing constraint is relaxed, or both. This result implies that the availability of aggressive mortgage lending instruments magnifies the real estate cycle and the effects of fundamental demand shocks. We empirically confirm the predictions of the model using recent subprime origination experience. In particular, we find that regions that receive a high concentration of aggressive lending instruments experience larger price increases and subsequent declines than areas with low concentration of such instruments. This result holds in the presence of various controls and instrumental variables.     

Mortgage Lending, Social Responsibility, and Public Policy: Some Perspectives on HMDA and CRA

This paper sets out a simple model of the neighborhood housing market. With this as a frame of reference it reviews some of the concerns associated with redlining and relates these to evidence presented at the HMDA and CRA Hearings. Does this evidence support the claims that lenders were acting irresponsibly? What if anything can be concluded from such evidence about the alleged role of inadequate and discriminatory lending in causing urban decay? The HMDA was approved so that citizens would have access to data which would enable them to appraise the social responsibility shown by lenders; and the CRA, so that regulatory agencies would have a tool to encourage lenders to do better. How well do the Acts fulfill these intentions?     

The information value of online social networks: Lessons from peer-to-peer lending

We examine whether social networks facilitate online markets using data from a leading peer-to-peer lending website. We find that borrowers with social ties are consistently more likely to have their loans funded and receive lower interest rates; however, most borrowers with social ties are more likely to pay late or default. We provide evidence that these findings are driven by lenders not fully understanding the relationship between social ties and unobserved borrower quality. Overall, our findings suggest caution for using online social networks as a signal of quality in anonymous transactions.     

Origination Channel,Prepayment Penalties and Default

This article presents evidence that nonbank‐originated subprime mortgages have a higher probability of default than bank‐originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that nonbanks price prepayment penalties less favorably to borrowers than banks do, and nonbanks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State antipredatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of nonbank originations relative to bank originations. These findings are consistent with incentives generated by nonbank compensation via yield spread premiums on loans with prepayment penalties.     

P2P网上借贷流行

这种借贷方式,在活跃了个人金融的同时,也需要细化监管。随着经济形势进一步恶化,越来越多的企业或者个人开始陷入现金匮乏的窘境,而银行却为降低坏账而加速紧缩银根,私人借贷步入到前所未有的困难时期。即便是最近紧急出炉的"金融国九条",也没能为此提供任何的解决之道。就在此时,一种专门为自然人之间提供相互借贷的网站,却悄然流行起来。     

Thy Neighbor’s Mortgage: Does Living in a Subprime Neighborhood Affect One’s Probability of Default?

This article focuses on the potential externalities associated with subprime mortgage origination activity. Specifically, we examine whether negative spillover effects from subprime mortgage originations result in higher default rates in the surrounding area. Our empirical analysis controls for loan characteristics, house price changes and alternative loan products. Our results indicate that, after controlling for these characteristics, the concentration of subprime lending in a neighborhood does not lead to greater default risks for surrounding borrowers. However, we do find that more aggressive mortgage products (such as hybrid adjustable rate mortgages and low/no‐documentation loans) had significant negative spillovers on other borrowers. Stated differently, the aggressive alternative mortgage designs were more toxic to the housing and mortgage market than previously believed.     

How Subprime Borrowers and Mortgage Brokers Shared the Pie

We develop an equilibrium model for origination fees charged by mortgage brokers and show how the equilibrium fee distribution depends on borrowers' valuation for their loans and their information about fees. We use noncrossing quantile regressions and data from a large subprime lender to estimate conditional fee distributions. Given the fee distribution, we identify the distributions of borrower valuations and informedness. The level of informedness is higher for larger loans and in better educated neighborhoods. We quantify the fraction of the surplus from the mortgage that goes to the broker, and how it decreases as the borrower becomes more informed.     

Lenders’ pricing strategy: Do neighborhood risks matter?

This article explores the different pricing strategies of lenders who originate both government-sponsored enterprise (GSE) and non-GSE loans. We find that conditional on loan and borrower characteristics and some observable local economic factors, mortgage rates on GSE loans vary significantly across regions. However, we observe no sizable regional variation in loan amounts or default risk. By contrast, the mortgage rates on non-GSE loans depend almost entirely on borrowers and loan characteristics. In addition, we find that spatial variations in GSE mortgage rates are highly responsive to regional prepayment risk. Our results are robust to various controls for neighborhood characteristics, including regional-level bank competition, borrower accessibility to mortgages, and household income levels. Overall, the findings offer a novel insight into how lenders adjust pricing strategies in response to a changing lending environment. The results provide implications relating to the present and imminent dangers of housing bubbles and the intensified refinancing wave following the COVID-19 pandemic.     

Residential-Mortgage Lending Discrimination and Lender-Risk-Compensating Policies

The Boston Federal Reserve study ( Munnell et al. 1996 ) concluded that illegal discrimination is a statistically significant contributor to the observed gap between white and minority residential-mortgage rejection rates. The Boston study speculated that discrimination arises because lenders do not equally apply risk compensation or mitigation policies for imperfect loans. Using the same 1990 Boston loan application data, our study specifically examines the relation between compensating policies and discrimination. Since compensating policies are encouraged by secondary-mortgage-market sale guidelines, we model both the lender's origination decision and its loan sale decision. Using a rule-based artificial-intelligence technique applied to each lender, we infer compensating policies (rules) that equally apply to all races and explain lending decisions. A minority-race indicator loses its statistical significance when an indicator of compensating-policy violations appears in the loan accept–reject equation. This result reflects the fact that the risk levels of marginal minority loans tend to be more extreme than those of marginal white loans. However, the result does not necessarily reject the existence of discrimination. Equally applied policies may be empirically indistinguishable from unfairly applied policies. In addition, equally applied policies may fail the adverse-impact doctrine if they do not serve a business necessity (such as profits). The industry's move away from discretionary, rule-based decisions to mortgage scoring answers the need for a decision framework that rigorously uses loan performance to evaluate all loan applicants fairly.     

Some Loans Are More Equal than Others: Third–Party Originations and Defaults in the Subprime Mortgage Industry

We show how agency problems between lenders (principals) and third–party originators (TPO; agents) imply that TPO–originated loans are more likely to default than similar retail–originated loans. The nature of the agency problem is that TPOs are compensated for writing loans, but are not completely held accountable for the subsequent performance of those loans. Using a hazard model with jointly estimated competing risks and unobserved heterogeneity, we find empirical support for the TPO/default prediction using individual fixed–rate subprime loans with first liens secured by residential real estate originated between January 1, 1996, and December 31, 1998. We find that apparently equal loans (similar ability to pay, option incentives and term) can have unequal default probabilities. We also find that, initially, the agency–cost risk was not priced. At first, the market did not recognize the higher channel risk, since TPO and retail loans received similar interest rates even though the TPO loans were more likely to default. We also show that this inefficiency was short–lived. As the difference in default rates became apparent, interest rates on TPO loans rose about 50 basis points above otherwise similar retail loans.     

中国纺织服装业——蓄势待发

中国纺织服装业一直是实现贸易顺差的主要产业。但近两年来,在人民币升值、纺织品出口退税减少、生产成本大幅度攀升、美国次贷危机等诸多国内外因素的作用下,中国纺织服装业正面临着前所未有的"寒冬"时代。本文通过分析中国纺织服装业面临的困难,提出需要通过扩大内需市场的占有率以及进行产业整合来实现中国纺织服装业的整体转型。     

Predatory Lending Laws and the Cost of Credit

Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This article examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated with a modest increase (decrease) in cost.     

Preliminary Evaluation of the HECM Reverse Mortgage Program

This paper describes and evaluates the Home Equity Conversion Mortgage (HECM) insurance demonstration, designed to encourage the development of private reverse mortgage programs by insuring lenders against the risks associated with new mortgage lending programs and with reverse mortgages in particular. The paper evaluates demand for the program by analyzing the attributes of participating borrowers, their properties and the types of payment options chosen. It also presents several observations regarding participation by the financial community in the HECM demonstration, required counseling and legal and regulatory issues that may hamper the growth and development of reverse mortgage programs in general.
The findings suggest strong demand for reverse mortgages among "house-rich, cash-poor" elderly homeowners, either to supplement inadequate current incomes or to provide a reserve against unexpected lump-sum expenses. The flexible design of the HECM program addresses a wide variety of borrower financial needs, even though it imposes higher costs on lenders and servicers. The continued growth of the program, however, is hindered by a shortage of qualified housing counselors in some areas, as well as by a variety of legal and regulatory barriers.     

Subprime governance: Agency costs in vertically integrated banks and the 2008 mortgage crisis

Research summary: This study uses the 2008 mortgage crisis to demonstrate how the relationship between vertical integration and performance crucially depends on corporate governance. Prior research has argued that the vertical integration of mortgage origination and securitization aligned divisional incentives and improved lending quality. We show that vertical integration improved loan performance only in those firms with strong corporate governance and that this performance‐integration relationship strongly decreases and actually reverses as governance quality decreases. We interpret these findings as suggesting that the additional control afforded by vertical integration can, in the hands of poorly monitored managers, offset gains from aligned divisional incentives. These findings support the view that corporate governance influences the strategic outcomes of a firm, in our case, by influencing the effectiveness of boundary decisions. Managerial summary: One of the unanswered questions of the 2008 mortgage crisis is why some firms produced toxic mortgages and others did not. Many have argued that vertically integrated banks—banks that both originated and securitized mortgages—had incentives to monitor themselves and thereby avoid overaggressive lending and outright fraud. Yet many of the worst lenders, such as Washington Mutual and New Century Financial, were in fact integrated. This study shows that the behavior of these firms critically depended on their corporate governance. We find that poorly monitored executives used their additional control over the integrated businesses to issue low quality loans that supported short‐term growth. Our results suggest that governance is a crucial prerequisite for financial services, particularly for firms whose managers control multiple, interrelated businesses. Copyright © 2015 John Wiley & Sons, Ltd.