Determinants of Multifamily Mortgage Default

Option–based models of mortgage default posit that the central measure of default risk is the loan–to–value (LTV) ratio. We argue, however, that an unrecognized problem with extending the basic option model to existing multifamily and commercial mortgages is that key variables in the option model are endogenous to the loan origination and property sale process. This endogeneity implies, among other things, that no empirical relationship may be observed between default and LTV. Since lenders may require lower LTVs in order to mitigate risk, mortgages with low and moderate LTVs may be as likely to default as those with high LTVs. Mindful of this risk endogeneity and its empirical implications, we examine the default experience of 495 fixed–rate multifamily mortgage loans securitized by the Resolution Trust Corporation (RTC) and the Federal Deposit Insurance Corporation (FDIC) during the period 1991–1996. The extensive nature of the data supports multivariate analysis of default incidence in a number of respects not possible in previous studies. Consistent with our expectations, we find that LTV evidences no relationship to default incidence, while the strongest predictors of default are property characteristics, including three–digit ZIP code location and initial cash flow as reflected in the debt coverage ratio. The latter results are particularly interesting in that they dominated the influence of postorigination changes in the local economy.     

Household Income, Termination Risk and Mortgage Pricing

The premium embedded in home mortgage loans to compensate investors for their exposure to prepayment risk is a significant component of the cost of home mortgage lending. Moreover, there is some reason to believe that prepayment risk may be lower for loans to lower-income housing borrowers, especially those that are first-time home owners. If so, investor recognition of this advantage should facilitate greater willingness to acquire portfolios of lower-income housing loans, and encourage more competitive pricing in this segment of the market. This study investigates the possibility of differential mortgage prepayment behavior between lower-income home owners and non-low income home owners. The investigation relies on samples of the American Housing Survey spanning ten years of experience from 1985 to 1995. We find no significant difference between the termination or refinancing behavior of non-low income and low-income households. This result is robust to a number of alternative specifications such as restricting the low-income test group to non-moving households and to first-time owners. The same conclusions are derived from both aggregate prepayment rates and from analysis of individual household prepayment behavior.     

Endogenous risk in weed control management

Weed control decisions are modeled in an endogenous risk framework where a producer invests in self-insurance and self-protection to reduce the severity of a realized pest infestation, or reduce the likelihood the infestation occurs. Self-insurance and self-protection are risk-reducing technologies that capture both the type and quantity of herbicides used. We supply conditions to unambiguously sign the effects of an increase in the probability of application or effectiveness failure and increased application or effectiveness uncertainty on optimal herbicide choices. If self-protection and self-insurance are stochastic substitutes, non-point source pollution policies targeted to reduce herbicide loadings can increase the use of more persistent herbicides. Policies that decrease loadings by reducing total mass may induce a substitution to herbicides more damaging or more likely to be transported to sensitive areas.     

The ASB's Exposure Draft Statement of Principles: A Comment

This paper is based on a shorter comment sent to the Accounting Standards Board in response to the request for comments on the exposure draft, Statement of Principles for Financial Reporting. It is intended to be a comprehensive dissent from that ED, and also to suggest an alternative course of action for the ASB. In the first place, the ASB's position, according to which the provision of more fair value accounting (FVA)-based information is a central plank among its principles, is contested on the grounds of both (a) market incompleteness (entailing limited availability of reliable FVA-based information) and (b) lack of evidence of demand on the part of financial statement users for FVA-based information. In the second place, the ASB's approach to issues of recognition is subjected to critical analysis and found to be inadequate. Finally, the ASB's decision that the essential function of its Statement of Principles should be to advocate a set of recognition rules and measurement bases (including some that are controversial) is contested. Instead, it is proposed that the Statement of Principles should incorporate a larger framework, including a set of procedural principles, according to which the Board would reach conclusions on the various issues with which it has to deal, so that its conclusions would be seen to be authoritative because they had been reached by a process of rigorous enquiry in accordance with appropriate procedures. These principles would incorporate Rawls' (1971) notions of reflective equilibrium and procedural justice.