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.     

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.     

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.     

Hedging Forward Mortgage Loan Commitments: The Option of Futures and a Future for Options

The purpose of this paper is to analyze theoretically the problem of how mortgage lending institutions assume the interest rate risks inherent in the granting of fixed-rate mortgage loan commitments.
Two approaches to hedge this risk are analyzed. First, the use of the GNMA futures market is evaluated from the standpoint of how it might be used to hedge against mortgage commitment risks. Secondly, the use of an appropriate pricing model—the Black-Scholes option pricing model—is offered as a proxy for establishing the market value of a fixed-rate mortgage commitment. This model is extended and empirically estimated for several hypothetical environments.
The paper demonstrates a basic flaw in the GNMA futures market as a hedge against mortgage commitments. Once this is established, the use of the options pricing approach is offered as a more rational approach for hedging these risks.     

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.     

Industrial Real Estate Mortgage Default Experience of the New York State Job Development Authority Second Loan Program: A Preliminary Investigation

This paper explores the loan loss experience of a public industrial lending authority, employing contemporaneous borrower net equity as a link to mortgage loan default. The relationship between default, net equity and bankruptcy is tested on a small longitudinal data set of loans using nonparametric statistics and a proportional hazard model. Results show that negative net equity and firm bankruptcy are strongly associated with default among the study population. Further, the borrowers studied did not exercise the put option promptly, suggesting potential benefits from monitoring net equity one year or more prior to default.     

The Effects of Securitization on Consumer Mortgage Costs

We examine the effects of securitization on two dimensions of consumer mortgage costs: coupon rates and loan origination fees. We find no evidence that securitization reduces the coupon rates on fixed- or adjustable-rate mortgages. Instead, securitization appears to lower mortgage loan origination fees, resulting in substantial savings for consumers. Securitization activity includes passthrough creation and collateralized mortgage obligation (CMO) creation. We test for differences between the effects of passthrough and CMO creation on primary mortgage costs. Surprisingly, these activities appear to have indistinguishable effects on loan rates and origination fees, suggesting that a large derivatives market for mortgage loans is not creating value for consumers.     

建立住房抵押贷款保险制度促进房地产市场的发展

文章针对目前国内个人住房消费的现状,对现行的 押贷款体系中存在的问题进行了分析丐研究,提出了相应的对策,即建立住房抵押贷款保险制度。借鉴国际上发达国家的做法,通过保险分散抵押代款的风险,完善社会保障体系,促进个人住房抵押贷款的良性发展,进而房地产市场的健康发展。     

Per-customer quantity limit and price discrimination: Evidence from the U.S. residential mortgage market

Theoretically, if firms face a regulatory per-customer quantity limit, they should have an incentive to discriminatively charge high-demand customers higher prices and make them just willing to buy a quantity equal to the limit. In the U.S. residential mortgage industry, mortgages with origination balances above the conforming loan limits cannot be guaranteed by government-sponsored enterprises, which make lenders face a per-customer quantity limit. This paper finds that borrowers bunching at the limit pay higher interest rates due to price discrimination. This study rules out the alternative explanation that those borrowers are of higher risk (lending cost) than other borrowers.     

Alternative Lending Channels and the Crisis in U.S. Housing Markets

To what degree has the development of alternative mortgage funding channels promoted the recent boom and bust in U.S. housing markets? Past research examined whether Alt‐A and subprime market shares are correlated with the housing bubble. This article expands the analysis to include the share of specific “alternative” lending terms and finds that the shares of interest‐only and negative amortization loans are important factors in explaining the housing bubble. This result suggests that research on the housing market bubble should focus on the impacts of loan contract terms rather than loan channel.     

On the Assessment of Default Risk in Commercial Mortgage Lending

This paper takes an initial step toward the development of an empirically-based model of default risk assessment in the commercial mortgage market. A review of existing empirical studies of residential mortgage and commercial loan default provides evidence for appropriate model specification and estimation. A simple default risk model for commercial mortgages is then developed based upon the generalized default risk models of Jackson and Kaserman [1980] and Vandell [1981]. The model is then examined for its ability to successfully handle a variety of situations and used to test the validity of traditional ratio analysis "rules-of-thumb" employed in commercial lending. Ratio tests are found generally to be inconsistent with an objective of constraining default risk below some maximum. Finally, a modified ratio analysis consistent with the model and with a constrained default risk strategy is introduced.     

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.     

住房按揭贷款风险分析及防范

住房按揭贷款自开办以来，已初具规模。在实际运作中其风险仍无处不在，尤其是在“安全性”上存在着政策、市场、银行、抵押物等风险。要实现住房贷款的可持续发展，必须进行风险防范。章在分析当前住房按揭贷款风险的基础上，提出了几点防范措施。     

The Impact of Interstate Foreclosure Cost Differences and the Value of Mortgages on Default Rates

Previous research on mortgage default has focused on the costs, benefits, and characteristics of the mortgagor. In such studies default rates have been taken as a measure of mortgage risk. In this paper we present a model where the position of the lender affects the default-foreclosure process. Important to the lender's decision to foreclose rather than renegotiate an existing loan are the value of mortgage and the legal costs associated with foreclosure.
The empirical evidence supports the hypothesis that both the value of the mortgage and legal foreclosure costs affect the foreclosure rate. In those states where legal foreclosure costs are high rates are significantly less than where costs are low. This suggests that previous models which include only the costs and benefits of default to the borrower are incomplete and that foreclosure rates can not be taken as a strict measure of mortgage risk. That is, low foreclosure rates may indicate that losses occur in other forms of loan negotiation rather than in expensive legal costs.     

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.     

Do Deposit Rates Cause Mortgage Loan Rates?: The Evidence from Causality Tests

This paper applies two familiar causality detection techniques to the issue of whether it is costs that determine prices or vice versa in the mortgage loan market. The question is posed in terms of causal priority: Are savings and loan deposit rates causally prior to mortgage loan rates or is it the other way around? For the time period prior to the onset of deposit interest rate deregulation, the evidence that emerges is consistent with the view that lenders raised their loan rates in response to higher deposit rates of interest. However, for the more recent period of deregulation, the evidence is not consistent with this view.     

The Mortgage Acquisition Process: A Comparison of VRM and FRM Borrowers*

In recent years a number of alternative types of residential mortgage plans (i.e., alternative to the fixed-rate level-payment mortgage) have been proposed, and some of these have been available in various parts of the country. The most often proposed innovation has been the variable rate mortgage (VRM). The most widespread use of the VRM has been in the State of California, starting in early 1975. This paper discusses some of the results of a survey of over 1,700 homeowners in California that examined consumer reaction to the VRM. Specifically, this paper looks at the impact of the VRM on the mortgage acquisition process and the features of mortgages demanded by consumers. The data seem to indicate that the process of acquiring a mortgage has not been affected significantly by the availability of the VRM. However, the existence of alternative mortgage plans means that consumer choice can be broadened to include type of mortgage as well as lending institution.     

The Role of Home Equity Lending in the Recent Mortgage Crisis

Home equity lending grew rapidly from 2000 to 2008 with balances more than tripling. In this article, we examine the role this phenomenon may have played in increasing aggregate default risk during the mortgage crisis. We also document a relationship between growth in home equity lending and high house price depreciation and first mortgage default during the downturn of 2006–2009. Line of credit growth is shown to be associated with large increases in nonowner‐occupied property purchases, suggesting that home equity lines of credit were tapped to fund such investments, exacerbating default rates during the market downturn.     

Elective Mortgage Prepayment: Termination and Curtailment

Mortgage-prepayment risk underlies the structuring of mortgage-backed derivative securities, such as tranched real estate mortgage investment conduits. This prepayment comes either from mortgage termination or from curtailment, where the borrower retains the existing mortgage and prepays a portion. There are differences in cash flows from the two types of prepayment. In termination, the loan disappears from a pool, and the scheduled payment to investors in the pool is reduced. In curtailment, the loan survives, and the scheduled payment is unchanged but the term is reduced. There are implications for structuring mortgages and derivative securities. The prepayment decision is embedded in an in-tertemporal household utility maximization framework where choices are made between refinancing, making the regular payment, default or curtailment. Empirical results are presented for Government National Mortgage Association (GNMA) pools, and an algorithm is presented that separates the termination and curtailment components, facilitating the development of derivative securities.     

The 1989–92 Credit Crunch for Real Estate: A Retrospective

This study surveys a broad range of information to establish the degree to which real estate lending and construction activity decreased in the 1989–92 period owing to a "credit crunch." It reviews the conditions that led up to the contraction in mortgage lending and construction and then documents the extent to which the evidence is consistent with a credit crunch in lending for residential and nonresidential construction, permanent financing of income properties, and residential mortgage lending. Also, this study weighs the relative importance of the credit crunch and other factors that contributed to the falloff in real estate lending and contrasts the recent period with earlier credit crunch episodes.