Findings

Gold men

Kevin Lewis

February 14, 2017

Risk Targeting and Policy Illusions — Evidence from the Announcement of the Volcker Rule

Jussi Keppo & Josef Korte

Management Science, forthcoming

Abstract:
We analyze the Volcker Rule’s announcement effects on U.S. bank holding companies. In line with the rule and the banks’ public compliance announcements, we find that those banks that are affected by the Volcker Rule already reduced their trading books relative to their total assets 2.34% more than other banks. However, the announcement of the rule did not reduce the banks’ overall risk taking. To keep their risk targets, the affected banks raised the riskiness of their asset returns. We also find some evidence that the affected banks raised their trading risk and decreased the hedging of their banking business.

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Cross-Sectional Patterns of Mortgage Debt during the Housing Boom: Evidence and Implications

Christopher Foote, Lara Loewenstein & Paul Willen

NBER Working Paper, December 2016

Abstract:
The reallocation of mortgage debt to low-income or marginally qualified borrowers plays a central role in many explanations of the early 2000s housing boom. We show that such a reallocation never occurred, as the distribution of mortgage debt with respect to income changed little even as the aggregate stock of debt grew rapidly. Moreover, because mortgage debt varies positively with income in the cross section, equal percentage increases in debt among high- and low-income borrowers meant that wealthy borrowers accounted for most new debt in dollar terms. Previous research stressing the importance of low-income borrowing was based on the inflow of new mortgage originations alone, so it could not detect offsetting outflows in mortgage terminations that left the allocation of debt stable over time. And while defaults on subprime mortgages played an important part in the financial crisis, the data show that subprime lending did not cause a reallocation of debt toward the poor. Rather, subprime lending prevented a reallocation of debt toward the wealthy.

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Finance and Growth at the Firm Level: Evidence from SBA Loans

David Brown & John Earle

Journal of Finance, forthcoming

Abstract:
We analyze linked databases on all SBA loans and lenders and on all U.S. employers to estimate the effects of financial access on employment growth. Estimation exploits the long panels and variation in local availability of SBA-intensive lenders. The results imply an increase of 3 to 3.5 jobs for each million dollars of loans, suggesting real effects of credit constraints. Estimated impacts are stronger for younger and larger firms and when local credit conditions are weak, but we find no clear evidence of cyclical variation. We estimate taxpayer costs per job created in the range of $21,000 to $25,000.

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The effect of TARP on the propagation of real estate shocks: Evidence from geographically diversified banks

Karen Jang

Journal of Banking & Finance, forthcoming

Abstract:
This study examines the effect of TARP on the propagation of real estate shocks via geographically diversified banks in the U.S. I find that TARP money provided for banks exposed to distressed areas (i.e., “affected” banks) was positively associated with small business loan originations in “non-distressed” areas (i.e., counties with smaller real estate shocks), mitigating the shock transmission. In addition, the bailout funds facilitated “affected” banks’ faster return to their pre-crisis level of franchise value. Overall, the marginal benefit of TARP funds seems to have been greater for “affected” TARP banks. I conclude that this policy helped “affected” banks cleanse/strengthen their balance sheets and recapitalize, which paved the way for increased lending.

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Contagion effects in strategic mortgage defaults

Ryan Goodstein et al.

Journal of Financial Intermediation, forthcoming

Abstract:
Using a large sample of U.S. mortgages observed over the 2005–2009 period, we document contagion effects in strategic mortgage defaults. Strategic defaults result from borrowers choosing to exercise their in the money default option and our findings suggest this choice is influenced by the delinquency rate in surrounding zip codes (within a 5 mile radius), after controlling for other known determinants of mortgage default. These controls include a large array of borrower and loan characteristics, local demographic and economic conditions, spatial correlations, and changes in property values. Our findings that the local area delinquency rate is an important factor for strategic defaulters (borrowers that can be influenced in their decision) but not for defaults that are the result of inability to pay (borrowers that had no choice) lend support the contagion hypothesis. Our estimates suggest that a 1% increase in the local area delinquency rate may increase the probability of a strategic default by 7.25–16.5%.

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Arrested Development: Theory and Evidence of Supply-Side Speculation in the Housing Market

Charles Nathanson & Eric Zwick

NBER Working Paper, January 2017

Abstract:
This paper studies the role of disagreement in amplifying housing cycles. Speculation is easier in the land market than in the housing market due to frictions that make renting less efficient than owner-occupancy. As a result, undeveloped land both facilitates construction and intensifies the speculation that causes booms and busts in house prices. This observation reverses the standard intuition that cities where construction is easier experience smaller house price booms. It also explains why the largest house price booms in the United States between 2000 and 2006 occurred in areas with elastic housing supply.

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Does bank supervision impact bank loan growth?

Paul Kupiec, Yan Lee & Claire Rosenfeld

Journal of Financial Stability, February 2017, Pages 29–48

Abstract:
We estimate the impact of a poor bank examination rating on the growth rates of individual bank loan portfolios. We use a novel approach to control for loan demand variation and estimate a fixed-effect model using an unbalanced panel with over 381,000 bank-quarter observations from the period 1994–2011. Our estimates show that a poor examination rating has a large negative impact on bank loan growth, even after controlling for the impact of monetary policy, bank capital and liquidity conditions, and any voluntary reduction in lending triggered by weak legacy loan portfolio performance or other bank losses. This previously unidentified effect is consistent with the hypothesis that the bank supervision process successfully constrains the lending activities of banks operating in an unsafe and unsound manner.

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Measuring Foreclosure Impact Mitigation: Evidence from the Neighborhood Stabilization Program in Chicago

Xian Bak & Geoffrey Hewings

Regional Science and Urban Economics, March 2017, Pages 38–56

Abstract:
The Neighborhood Stabilization Program (NSP) is a $7 billion nationwide government program that was established to reduce the negative impacts of the housing crisis in foreclosure-concentrated neighborhoods. NSP rehabilitations aim to bring foreclosed and abandoned properties back to productive use. Very few quantitative studies have evaluated NSP and provided policy suggestions for future stabilization. Furthermore, there is some ambiguity about the channels through which foreclosures influence neighboring properties. This study fills the gap in the literature by evaluating the effects of NSP acquisition and rehabilitation in terms of the impact on elevating neighboring property values. In addition, it provides evidence that disamenity effects are a source of the negative impacts of foreclosures on their neighbors. Using a 2008–2014 repeated cross-section dataset for housing sales in the city of Chicago, the difference-in-differences estimates reveal that the average sales prices of homes within 0.1 miles of the NSP projects increased by 14.3% and these effects do not appear until the completion of the rehabilitation. Furthermore, large program effects are found for normal homes but not for foreclosure-related homes. The results vary under different contexts of NSP implementation, but the analytical approach presented in this study is reproducible for NSP studies in other regions.

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Public Investment and Housing Price Appreciation: Evidence from the Neighborhood Stabilization Program

Victor Westrupp

Stanford Working Paper, January 2017

Abstract:
This study assesses impact of the Neighborhood Stabilization Program (NSP), a federal program designed to convert foreclosed properties into renovated affordable housing through public investment. To identify the impact, I exploit a discontinuity in how neighborhoods were selected with respect to a critical threshold. The program caused non-foreclosure housing prices in targeted neighborhoods to appreciate 6.5% between 2009 and 2011. These pricing gains remained stable through the end of my sample in 2014. Furthermore, the program caused changes in neither the supply of foreclosures nor neighborhood income. This suggests quality improvement externalities were behind the price appreciation. Lastly, low market liquidity and asymmetric information in targeted neighborhoods may justify the NSP public initiative, despite foreclosure resale profitability after 2009.

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Runs versus Lemons: Information Disclosure and Fiscal Capacity

Miguel Faria-e-Castro, Joseba Martinez & Thomas Philippon

Review of Economic Studies, forthcoming

Abstract:
We study the optimal use of disclosure and fiscal backstops during financial crises. Providing information can reduce adverse selection in credit markets, but negative disclosures can also trigger inefficient bank runs. In our model, governments are thus forced to choose between runs and lemons. A fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy. Our model explains why governments with strong fiscal positions are more likely to run informative stress tests, and, paradoxically, how they can end up spending less than governments that are more fiscally constrained.

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Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default

Brian Melzer

Journal of Finance, forthcoming

Abstract:
Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession.

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Incentives for Loan Repayments: Evidence from a Randomized Field Study

Michael Collins, Leah Gjertson & Justin Sydnor

Journal of Consumer Affairs, forthcoming

Abstract:
This field experiment tests an innovative approach for helping automobile loan borrowers make their loan payments on time. Borrowers were randomly assigned to a loan with an interest rate reduction after three on-time payments; borrowers assigned to this loan show fewer late payments compared to a control group. While the financial incentive of the interest rate reduction was small, the offer of a rate reduction appears to result in borrowers attending to due dates. This result illustrates that lenders can use simple mechanisms to encourage more positive repayment patterns among borrowers with a history of late payments.

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Is something better than nothing? The impact of foreclosed and lease-purchase properties on residential property values

Youngme Seo & Michael Craw

Urban Studies, forthcoming

Abstract:
Lease-purchase (L-P) programmes that rehabilitate foreclosed property for sale as affordable housing may provide a way to reduce foreclosure externalities on nearby property values. This paper investigates the feasibility of such a strategy by estimating the effects of foreclosed properties on nearby residential property values compared with those of an L-P programme operated by the Cleveland Housing Network, Cleveland, Ohio. The findings indicate that although both L-P and foreclosed properties have a negative effect on the value of nearby non-distressed homes, the negative effect of foreclosure is larger. At the same time, the scope of the foreclosure externality is greater in low- and moderate-income neighbourhoods, while the foreclosure externality is generally smaller in high income neighbourhoods. Such results imply that an L-P strategy is likely to be more effective in offsetting foreclosure externalities in low- and moderate-income neighbourhoods than in high income neighbourhoods.

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Borrower Selection into Credit Markets: Evidence from Peer-to-Peer Lending

Inessa Liskovich & Maya Shaton

Federal Reserve Working Paper, December 2016

Abstract:
We exploit a quasi-natural experiment in the peer-to-peer lending market to show that the mechanism determining interest rates, irrespective of their levels, influences households' decisions to participate in credit markets. A large online platform unexpectedly switched from auction pricing of loans to centralized price assignment by credit grade. After the change all borrowers in a given credit grade were assigned the same interest rate, potentially exacerbating asymmetric information between borrowers and lenders. Surprisingly, we find that the creditworthiness of borrowers listing on the platform improves. This effect is mainly driven by lower quality borrowers leaving the platform, and is most pronounced for households looking to consolidate existing debt. As a result, less credit is allocated to lower credit quality borrowers. Our findings suggest that the manner in which interest rates are set is an important determinant of households' financing decisions and of selection into credit markets.

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Assessing bankruptcy reform in a model with temptation and equilibrium default

Makoto Nakajima

Journal of Public Economics, January 2017, Pages 42–64

Abstract:
A life-cycle model with equilibrium default in which agents with and without temptation coexist is constructed to evaluate the 2005 bankruptcy law reform. The calibrated model indicates that the 2005 reform reduces bankruptcies, as seen in the data, and improves welfare, as lower default premia allows better consumption smoothing. A counterfactual reform of changing income garnishment rate is also investigated. Interesting contrasting welfare effects between two types of agents emerge. Agents with temptation prefer a lower garnishment rate as tighter borrowing constraint prevents them from over-borrowing, while those without prefer better consumption smoothing enabled by a higher garnishment rate.


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