The Optimal Choice for Lenders Facing Defaults: Short Sale,Foreclose, or REO

When mortgage borrowers default and have no desire or ability to keep their property, then loss mitigation involves a sale of the property via one of the following options: (1) the lender allows pre-foreclosure “short sale” by the borrower, (2) the lender institutes the foreclosure process under a notice of default and the property is sold during the process by the borrower, and (3) the lender forecloses on the property, takes title, and sells the property in the market as real estate owned (REO). Sale of the property in the above three options is conducted by a motivated seller, either the owner or the lender, who desires to sell the property as quickly as possible. Thus, relative to a no-default sale, the house is most likely to be sold at a discounted price. It is generally expected that the discount would be lower in the case of a “short sale.” This option, however, may result in a longer marketing time, thus a higher total loss, than the other two options. We developed a model that allows simultaneous estimation of price and time-on-market effects of “short sales,” foreclosures, and REO options. We find that the short-sale option has the lowest-price discount, but significantly higher costs associated with marketing time. The pattern of price discount and marketing time reverses as we move to a sale while in the process of foreclosure and to a sale with an REO status.     

Arbitrage Free Price Bounds for Property Derivatives

Market frictions inhibit the perfect replication of property derivatives, and define the property spread as a price measure in the incomplete real estate market. We identify transaction costs, transaction time, and short sale constraints as the main frictions in this market. Based on these frictions, we set up a framework of arbitrage free price bounds for property derivatives. In turn, we use observed derivative prices to determine the implied cost of the frictions. Lastly, we verify these values by using other research, which confirms the accuracy of our framework.     

Foreclosure,REO, and Market Sales in Residential Real Estate

Assessment of lender and third-party bidder acquired properties at foreclosure auction is provided. Properties acquired at foreclosure auction by third-party bidders transact at a discount to lender dispositions of real estate owned (REO) properties. The discount reflects a reduction in costs associated with lender owned (REO) dispositions and uncertainty faced by third-party bidders. Moreover, there is a ranking in transaction prices among initial purchases by third-party bidders at foreclosure auction, REO sales, non-distressed property sales and the subsequent sales of third-party bidder acquired properties. Third-party bidder auction prices are below REO sale prices, which are below non-distressed property sale prices, which are below the subsequent sale prices of third-party bidder acquired properties. The price spacing by cohort is logical, intuitive and economically justified in a market with rational participants. Implications are also apparent for the measurement of price changes, net sale proceeds and returns to residential real estate.     

Cash and Distressed House Sales Price Discounts: Dual Sample Selection Spatial Interdependence Approaches

Beginning with a hedonic price model, and then progressing to a method accounting for dual sample selectivity biases and spatial interdependence; we document (and correct for) these potential confounding biases, and produce price counterfactuals for (1) all-cash financed property, (2) distressed property, and (3) all-cash and distressed property transactions. Results provide evidence of self- selection biases with all-cash purchasers, distressed properties, and distressed and all-cash properties. Significant disparities in observed cash (?13% and ?6.5%) and distressed property discounts (?1% and ?6%) are documented in pre-and post-recessionary environments, Further, cash discounts are consistent for non-distressed transactions (?11%) during both periods; however cash discounts associated with non-distressed transactions are significantly reduced post-recession (?23.3% to ?3.7%. This attenuation is attributed to a significant increase in the relative frequency of cash purchased distressed properties post-recession, i.e., larger percentage of cash buyers. Sub-sample counterfactual tests confirm prior results, and expand our understanding of all-cash and distressed discount determinants. These results provide insight into observed time variant all-cash, and distressed property discount affect sizes.     

Stock index futures arbitrage in emerging markets: Polish evidence

The efficiency of the market for stock index futures and profitability of arbitrage for contracts on the Warsaw Stock Exchange Index WIG20 is studied in this paper. The Polish market has unique attributes: in a relatively short time the risk-free interest rate has decreased significantly, short sale cannot be used to construct an arbitrage position by institutional investors, and the dividends are small and paid in an irregular manner. Examining intraday transaction data shows that ex post and ex ante violations for short arbitrage reveal almost all properties of a mature market. Nonetheless, findings for long arbitrage indicate inefficiency of the market.     

Distribution of Ownership,Short Sale Constraints,and Market Efficiency: Evidence from Cross‐Listed Stocks

We investigate the interplay between the distribution of ownership, short sale constraints, and market efficiency. Using minute‐by‐minute data during the period surrounding the short sale ban of 2008, we demonstrate that short sale restrictions cause price disparities among cross‐listed stocks when ownership in the stocks is distributed unevenly across the two markets. The stocks tend to trade at a premium in the market where long sellers are relatively scarcer, which reduces the speed at which prices adjust to bad news. The premium is driven primarily by an increase on the ask side of the market where ownership is thinner, is only evident when prices are moving down, and disappears quickly.     

Short Sale Constraints and Dispersion of Opinion: Evidence from the Indian Equity Market

Short sale constraints can inflate market prices, as bearish investors cannot act on their market views. The paper uses data from the Indian equity market to test whether opinion dispersion leads to higher overpricing when short sales are prohibited. The Indian equity market provides a natural testing environment, as short sales were banned between 2001 and 2008. The empirical results offer supportive evidence of the relation between opinion dispersion and overpricing in a market with short sale constraints.     

Security price formation and informed trading with constrained short selling

Short sale orders account for a substantial portion of trading volume in recent years. This paper develops a sequential trade model with constrained short selling to derive the effect on prices when the market maker can observe short selling in the order flow. The model predicts that market quotes will adjust differently to short sales and regular sales. Furthermore, the model shows that the probability of informed trading is impacted both by the level of short sale constraints and the intensity of actual short sale trades. Simulation evidence confirms that estimates of the probability of informed trade are improved when accounting for past short selling activity. The results demonstrate the information benefits of short selling transparency.

     

Heterogeneous Expectations,Restrictions on Short Sales,and Equilibrium Asset Prices

Under heterogeneous expectations, the mean–variance model of capital market equilibrium is employed to determine the effect restricting short sales has on equilibrium asset prices. Two equivalent markets differing only with respect to short sale restrictions are compared. It is shown that, in general, risky asset prices can either rise or fall due to short sale constraints. However, under a homogeneity of beliefs for the covariance matrix of future prices, short sale constraints will only increase risky asset prices.     

Price concessions,time on the market,and the actual sale price of homes

This article examines the relationships between listing price concessions, time on the market, and the actual sale price of homes. The principal hypothesis that significant listing price concessions, usually the result of overpricing, can lead to real discounts on the final sale price is proven by our empirical results. We also found that the longer the time on the market, the higher the sale price, ceteris paribus. This finding is consistent with the theory that the longer a property remains on the market, the higher the probability is that a relatively superior selling price can be realized.     

Fire sale acquisitions: Myth vs. reality

We provide empirical evidence on the conjecture that in economic crises, firms could be forced to sell at deep discounts, or fire sale prices. Using the conventional stock price near the announcement date, we find instead distressed firms in crisis periods receive a 30% higher offer premium than distressed firms in normal periods; they also receive a 34% higher premium than non-distressed firms in crisis periods. Acquirers also do not gain, at announcement and over the long-term. Acquirers, however, may perceive they realize fire sale discounts if the reference is the targets’ highest price in the previous 52 weeks.     

Short Sale Constraints and Single Stock Futures Introductions

This paper exploits the unique experimental setting created by nearly 1,300 new single stock futures listings on the OneChicago exchange between 2003 and 2009. I investigate the impact of derivatives introductions on the tightness of short sale constraints facing their underlying assets. After controlling explicitly for supply and demand conditions in the stock lending market, this experiment reveals a precipitous decline in active utilization rates and loan fees in the lending market, after the futures introductions. The paper provides strong evidence that supports the view that derivatives represent a viable alternate synthetic short selling venue relaxing short sale constraints facing their underlying assets.     

The impact of naked short selling on the securities lending and equity market

This paper examines the impact of naked short selling on equity markets where it is restricted to securities on an approved list. Consistent with Miller's (1977) intuition, stocks with the highest dispersion of opinions and short sale constraints are the only stocks to exhibit significant and negative abnormal returns in the post-event period. We also find slightly higher stock return volatility and a small reduction in liquidity when naked short sales are allowed. Overall, it impairs market quality (liquidity and volatility), although there appears to be some improvement in price efficiency in stocks with high short sale constraints.     

The Valuation Impact on Distressed Residential Transactions: Anatomy of a Housing Price Bubble

Most previous empirical studies on foreclosure price discounts are based on data from housing-markets during periods of relative stability (Baton Rouge, Louisiana; Arlington, Texas; and Las Vegas, Nevada in 1980s and 1990s). The few studies with sample periods containing the Liquidity Crisis of 2008 were all focused on the Las Vegas market and even fewer studies have examined the pricing implications of short sale transactions. This study examines the discounts associated with foreclosure and short sale status in the Fresno, California from 2006 to 2010, a time period containing significant housing price volatility. Generally, we find approximately 20 % and 13 % discounts for foreclosure transactions and short sale transactions, respectively. These discounts remain consistent even after controlling for endogeneity of time-on-the-market and self-selection bias. We also document that both the foreclosure and short-sale discounts are time varying based on market conditions. Both foreclosure and short-sale discounts increase from 2008 to 2009 and decrease in 2010. Also, the foreclosure status decreases time on the market while the short-sale status increases time on the market.     

Are short sellers positive feedback traders? Evidence from the global financial crisis

Short sellers are routinely blamed for destabilizing stock markets by exacerbating deviations from fundamental values. In response, regulators periodically impose short sale constraints aimed at preventing excessive stock market declines. One explanation is that policy makers regard short sellers as behaving like positive feedback traders. Relying on the theoretical model put forward by Sentana and Wadhwani (1992), which stresses the conditional nature of returns’ persistence, bans on selected financial stocks in six countries during the 2008/2009 global financial crisis are examined. These provide us with a setting to analyze the impact of short sale restrictions on feedback trading. Our findings suggest that, in the majority of markets examined, restrictions of this kind amplify positive feedback trading during periods of high volatility and, hence, contribute to stock market downturns. On balance then, short selling bans do not contribute to enhancing financial stability.     

Transaction Frequency and Commercial Property

Metrics using repeat sale data assume that frequently and infrequently sold properties are similar in capital expenditures, maintenance and other characteristics. Value-added investors concentrate on repositioning properties which requires capital investment and managerial skills. Returns using repeat sales likely overstate appreciation by misattributing this investment. Present results show that frequently and infrequently traded properties represent different property populations. The first sale of a repeat transaction sells at a significant discount compared to single sale properties while the second sale transacts at a premium. The results suggest that repeat sale indices may overstate price appreciation and represent returns for a different, relatively small cohort of properties when compared to the large number of properties that transact only once during a specific time period.     

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short‐selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short‐sale bans. We find no evidence that short‐sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short‐selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short‐selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.     

Sovereign CDS Spreads,Volatility, and Liquidity: Evidence from 2010 German Short Sale Ban

The paper examines global impact of 2010 German short sale ban on sovereign credit default swap (CDS) spreads, volatility, and liquidity across 54 countries. We find that CDS spreads continue rising after the ban in the debt crisis region, which suggests that the short selling ban is incapable of suppressing soaring borrowing costs in these countries. However, we find that the ban helps stabilize the CDS market by reducing CDS volatility. The reduction in CDS volatility is greater in the eurozone than that in the non‐eurozone. Furthermore, we find that the CDS market liquidity has been impaired during the ban for the PIIGS (Portugal, Ireland, Italy, Greece, and Spain) countries. In contrast, there are no dramatic changes in the market liquidity for non‐PIIGS eurozone and non‐eurozone samples. The findings suggest that the short sale ban is ineffective to reduce sovereign borrowing costs in the debt crisis region if the underlying economy has not been significantly improved.     

Efficiency and Incentives in Residential Brokerage

The literature on broker intermediation in residential real estate has shown positive pricing effects associated with the use of a broker and mixed results as far as the pricing effects of nonstandard commission structures. On the premise that real estate broker incentives emanate from two primary sources, factors that increase broker operating efficiency and negotiable features arising from the relationship between the listing broker and the seller, this study assesses the degree to which these incentives affect the marketing time, probability of sale, and selling price of single-family houses. Of particular interest, this study investigates efficiency and broker intermediation effects on residential property associated with a broker concentrating his listings into a service area. Empirical results show that properties within an individual broker??s GIS-determined service area are more likely to sell, sell faster, and sell with an associated price premium. These effects are more concentrated in the market for higher priced homes. Also, additional compensation favorably motivates the broker with higher-priced properties, but has no effect on the sale of lower-priced properties.     

Impact of short selling activity on market dynamics: Evidence from an emerging market

With unique daily short sale data of Borsa Istanbul (stock exchange of Turkey), we investigate the dynamic relationship between short selling activity and volatility, liquidity and market return from January 2005 to December 2012 using a VAR(p)-cDCC-FIEGARCH(1,d,1) approach. Our findings suggest that short sellers are contrarian traders and contribute to efficient stock market in Turkey. We also show that increased short selling activity is associated with higher liquidity and decreased volatility. However this relation weakens during the financial turmoil of 2008. Our results indicate that any ban on short sales may be detrimental for financial stability and market quality in Turkey.