Reserved
The Subprime Crisis: Is Government Housing Policy to Blame?
Robert Avery & Kenneth Brevoort
Review of Economics and Statistics, forthcoming
Abstract:
Some have suggested that housing policy, embodied by the Community Reinvestment Act (CRA) and affordable housing goals of the government sponsored enterprises (GSEs), caused the subprime crisis. We examine if these programs led to worse mortgage outcomes using two approaches. The first examines whether more activity by CRA-covered lenders, or more loan sales to the GSEs, was associated with worse outcomes. The second uses regression discontinuity to determine if outcomes were worse at the geographic thresholds used by each program. Our results suggest that neither program played a significant role in the subprime crisis.
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Who Facilitated Misreporting in Securitized Loans?
John Griffin & Gonzalo Maturana
Journal of Finance, forthcoming
Abstract:
This paper examines apparent misrepresentation among securitized non-agency loans using three indicators: unreported second liens, owner occupancy misreporting, and appraisal overstatements. We find that over 30% of loans exhibited some indication of misrepresentation. Misreporting is similar in both low and full-documentation loans and is associated with a 51% higher likelihood of delinquency. Interest rates at origination and activity around securitization thresholds indicate that originators were largely aware of second-lien misreporting and, to some extent, inflated appraisals. Misrepresentation also explains substantial cross-sectional differences in future MBS losses. Losses were predictable and initiating from MBS underwriters and loan originators.
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Secular Stagnation: The Long View
Barry Eichengreen
NBER Working Paper, January 2015
Abstract:
Four explanations for secular stagnation are distinguished: a rise in global saving, slow population growth that makes investment less attractive, averse trends in technology and productivity growth, and a decline in the relative price of investment goods. A long view from economic history is most supportive of the last of these four views.
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Credit Supply and the Housing Boom
Alejandro Justiniano, Giorgio Primiceri & Andrea Tambalotti
NBER Working Paper, January 2015
Abstract:
The housing boom that preceded the Great Recession was due to an increase in credit supply driven by looser lending constraints in the mortgage market. This view on the fundamental drivers of the boom is consistent with four empirical observations: the unprecedented rise in home prices and household debt, the stability of debt relative to house values, and the fall in mortgage rates. These facts are difficult to reconcile with the popular view that attributes the housing boom to looser borrowing constraints associated with lower collateral requirements. In fact, a slackening of collateral constraints at the peak of the lending cycle triggers a fall in home prices in our framework, providing a novel perspective on the possible origins of the bust.
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A Tale of Two Vintages: Credit Limit Management Before and After the CARD Act and Great Recession
Larry Santucci
Federal Reserve Working Paper, February 2015
Abstract:
This paper uses tradeline-level credit card data to examine initial credit limits and early credit limit increases before and after the Great Recession and implementation of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the CARD Act). I compare two vintages of credit card accounts, those opened in 2005 and 2011; I also follow each vintage for more than two years after the account opening. In general, I find that significantly less credit was extended to approved credit card applicants in 2011 than in 2005. Accounts in the 2011 vintage started out with lower initial credit limits, received fewer limit increases, and received a smaller increase amount in dollar terms. These changes were most pronounced among the riskiest 25 percent of accounts opened in 2011. For this segment of the market, the median initial credit limit fell 66.7 percent to $500, and the median limit increase amount fell by at least 25 percent at each observation point. At the same time, limit increases occurred more often and sooner for this group, perhaps in recognition of the very low starting limits.
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Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications
John Coates
Yale Law Journal, January-February 2015, Pages 882-1011
Abstract:
Some members of Congress, the D.C. Circuit, and the legal academy are promoting a particular, abstract form of cost-benefit analysis for financial regulation: judicially enforced quantification. How would CBA work in practice, if applied to specific, important, representative rules, and what is the alternative? Detailed case studies of six rules - (1) disclosure rules under Sarbanes-Oxley section 404; (2) the SEC's mutual fund governance reforms; (3) Basel III's heightened capital requirements for banks; (4) the Volcker Rule; (5) the SEC's cross-border swap proposals; and (6) the FSA's mortgage reforms - show that precise, reliable, quantified CBA remains unfeasible. Quantified CBA of such rules can be no more than "guesstimated," as it entails (a) causal inferences that are unreliable under standard regulatory conditions; (b) the use of problematic data; and/or (c) the same contestable, assumption-sensitive macroeconomic and/or political modeling used to make monetary policy, which even CBA advocates would exempt from CBA laws. Expert judgment remains an inevitable part of what advocates label "gold-standard" quantified CBA, because finance is central to the economy, is social and political, and is non-stationary. Judicial review of quantified CBA can be expected to do more to camouflage discretionary choices than to discipline agencies or promote democracy.
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Changes in Buyer Composition and the Expansion of Credit During the Boom
Manuel Adelino, Antoinette Schoar & Felipe Severino
NBER Working Paper, January 2015
Abstract:
Earlier research has suggested that distortions in the supply of mortgage credit during the run up to the 2008 financial crisis, in particular a decoupling of credit flow from income growth, may have been responsible for the rise in house prices and the subsequent collapse of the housing market. Focusing on individual mortgage transactions rather than whole zip codes, we show that the apparent decoupling of credit from income shown in previous research was driven by changes in buyer composition. In fact, the relationship between individual mortgage size and income growth during the housing boom was very similar to previous periods, independent of how we measure income. Zip codes that had large house price increases experienced significant changes in the composition of buyers, i.e. home buyers (mortgage applicants) had increasingly higher income than the average residents in an area. Poorer areas saw an expansion of credit mostly through the extensive margin, i.e. a larger numbers of mortgages originated, but at DTI levels in line with borrower income. When we break out the volume of mortgage origination from 2002 to 2006 by income deciles across the US population, we see that the distribution of mortgage debt is concentrated in middle and high income borrowers, not the poor. Middle and high income borrowers also contributed most significantly to the increase in defaults after 2007. These results are consistent with an interpretation where house price expectations led lenders and buyers to buy into an unfolding bubble based on inflated asset values, rather than a change in the lending technology.
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Strategic Mortgage Default: The Effect of Neighborhood Factors
Michael Bradley, Amy Crews Cutts & Wei Liu
Real Estate Economics, forthcoming
Abstract:
This article studies strategic default - the willingness of a borrower to walk away from a mortgage when the value of the home falls below the unpaid principal balance despite an ability to pay. This study differs from the literature in two fundamental ways. First, we use unique data assets describing the household's equity position and capacity to carry the debt in addition to credit performance to identify strategic defaulters accurately. Second, we address externalities from local foreclosures and other strategic defaults and find that the incidence of strategic default is sensitive to the presence of other nearby strategic defaulters. These results have significant implications for foreclosure and loss mitigation policies employed by servicers and investors.
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State Mandated Financial Education and the Credit Behavior of Young Adults
Alexandra Brown et al.
Federal Reserve Working Paper, August 2014
Abstract:
In the U.S., a number of states have mandated personal finance classes in public school curricula to address perceived deficiencies in financial decision-making competency. Despite the growth of financial and economic education provided in public schools, little is known about the effect of these programs on the credit behaviors of young adults. Using a panel of credit report data, we examine young adults in three states where personal financial education mandates were implemented in 2007: Georgia, Idaho, and Texas. We compare the credit scores and delinquency rates of young adults in each of these states pre- and post-implementation of the education to those of students in a synthetic control state and then bordering states without financial education. We find that young people who are in school after the implementation of a financial education requirement have higher relative credit scores and lower relative delinquency rates than those in control states.
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Spare Tire? Stock Markets, Banking Crises, and Economic Recoveries
Ross Levine, Chen Lin & Wensi Xie
NBER Working Paper, January 2015
Abstract:
Do stock markets act as a "spare tire" during banking crises, providing an alternative corporate financing channel and mitigating the economic severity of banking crises? Using firm-level data in 36 countries from 1990 through 2011, we find that the adverse consequences of banking crises on firm profitability, employment, equity issuances, and investment efficiency are smaller in countries with stronger shareholder protection laws. These findings are not explained by the development of stock markets or financial institutions prior to the crises, the severity of the crisis, or overall economic, legal, and institutional development. The evidence is consistent with the view that stronger shareholder protection laws provide the legal infrastructure for stock markets to act as alternative sources of finance when banking systems go flat, easing the impact of the crisis on the economy.
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Paul Poast
International Organization, Winter 2015, Pages 63-95
Abstract:
War is expensive - troops must be equipped and weapons must be procured. When the enormous borrowing requirements of war make the sovereigns' credibility problem more difficult, central banks enhance a government's ability to borrow. By being the sole direct purchaser of government debt, the central bank increases the effective punishment that can be imposed on the government for defaulting on the marginal lender. This increases lenders' confidence that the government will be punished in case of default, making lenders willing to purchase the debt at a lower rate of interest. The sovereign, dependent on the low borrowing costs offered by the central bank, has an incentive to retain the bank. Data covering the nineteenth and early twentieth centuries reveal that possessing a central bank lowers the sovereign's borrowing costs, particularly during times of war.
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How important is variability in consumer credit limits?
Scott Fulford
Journal of Monetary Economics, forthcoming
Abstract:
Using a large panel this paper first demonstrates that individuals gain and lose access to credit frequently. The estimated credit limit volatility is larger than most estimates of income volatility and varies over the business cycle. Within a model, variable credit limits create a reason for households to hold both high interest debts and low interest savings at the same time. Using the estimated credit volatility, the model explains why around one third of American households engage in this credit card puzzle. The approach also offers an important new channel through which financial system uncertainty can affect household decisions.
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Sumit Agarwal, Itzhak Ben-David & Vincent Yao
Management Science, forthcoming
Abstract:
Financially constrained borrowers have the incentive to influence the appraisal process in order to increase borrowing or reduce the interest rate. We document that the average valuation bias for residential refinance transactions is above 5%. The bias is larger for highly leveraged transactions, around critical leverage thresholds, and for transactions mediated through a broker. Mortgages with inflated valuations default more often. Lenders account for 60%-90% of the bias through pricing.
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Borrowers from a different shore: Asian outcomes in the U.S. mortgage market
Marsha Courchane, Rajeev Darolia & Adam Gailey
Journal of Housing Economics, June 2015, Pages 76-90
Abstract:
Even though Asians are now the largest minority group participating in United States mortgage markets, research on differences in underwriting and pricing outcomes in mortgages typically focuses on the outcomes of African American and Hispanic borrowers. One explanation for the lack of attention on Asian outcomes follows from the perceived relative economic prosperity of this minority group, which may lead to the belief that they are less in need of consumer protection or policy support. While simple group averages of economic characteristics support this belief, documented heterogeneity of Asian experiences suggests that the use of other measures may be needed to account for the varied outcomes of Asians in the U.S. housing markets. Using a unique proprietary source of lender data, we examine these Asian outcomes. We find that Asians face challenges in mortgage markets in ways that may be unique as compared to other minority groups. For example, while an examination of unadjusted average denial rates indicates favorable outcomes for Asians compared to other minority groups, we find that after accounting for loan and borrower characteristics, Asians have denial rates as high as other minority groups.
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Fraudulent Income Overstatement on Mortgage Applications during the Credit Expansion of 2002 to 2005
Atif Mian & Amir Sufi
NBER Working Paper, February 2015
Abstract:
Academic research, government inquiries, and press accounts show extensive mortgage fraud during the housing boom of the mid-2000s. We explore a particular type of mortgage fraud: the overstatement of income on mortgage applications. We define "income overstatement" in a zip code as the growth in income reported on home-purchase mortgage applications minus the average IRS-reported income growth from 2002 to 2005. Income overstatement is highest in low credit score, low income zip codes that Mian and Sufi (2009) show experience the strongest mortgage credit growth from 2002 to 2005. These same zip codes with high income overstatement are plagued with mortgage fraud according to independent measures. Income overstatement in a zip code is associated with poor performance during the mortgage credit boom, and terrible economic and financial economic outcomes after the boom including high default rates, negative income growth, and increased poverty and unemployment. From 1991 to 2007, the zip code-level correlation between IRS-reported income growth and growth in income reported on mortgage applications is always positive with one exception: the correlation goes to zero in the non-GSE market during the 2002 to 2005 period. Income reported on mortgage applications should not be used as true income in low credit score zip codes from 2002 to 2005.
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Is ageing deflationary? Some evidence from OECD countries
P. Gajewski
Applied Economics Letters, forthcoming
Abstract:
We present a theoretical and empirical discussion related to interconnections between inflation and ageing, providing some empirical results regarding the impact of ageing-related variables on inflation in a sample of OECD countries. According to the macroeconomics textbook ageing is generally inflationary, but a growing body of arguments can be identified to support the opposite impact. The simple empirical model is estimated via Fixed Effects (FE) and panel-corrected SE (PCSE), robust to groupwise heteroscedasticity and serial correlation. Generally, our results suggest that ageing exerts downward pressure on prices. The findings contradict the common view, but also do not fully conform with some of the recent hypotheses.
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Information Externalities, Neighborhood Characteristics and Home Mortgage Pricing and Underwriting
Ioan Voicu et al.
Real Estate Economics, forthcoming
Abstract:
Theories of rational redlining suggest thinness in housing markets should lead to greater uncertainty in house price appraisals, increasing mortgage denial rates or pricing. Empirical tests found support for this theory in mortgage underwriting using 1990s data. Using 2006 data and bank-specific regression models, we revisit this topic in light of two developments leading to the recent mortgage bubble: the widespread securitization that allowed banks to shift loan risk to investors and the advent of risk-based pricing. Consistent with expectations, we find that information externalities have become economically very small and have shifted from underwriting to pricing decisions.
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The Determinants of Subprime Mortgage Performance Following a Loan Modification
Maximilian Schmeiser & Matthew Gross
Federal Reserve Working Paper, December 2014
Abstract:
We examine the evolution of mortgage modification terms obtained by distressed subprime borrowers during the recent housing crisis, and the effect of the various types of modifications on the subsequent loan performance. Using the CoreLogic LoanPerformance dataset that contains detailed loan level information on mortgages, modification terms, second liens, and home values, we estimate a discrete time proportional hazard model with competing risks to examine the determinants of post-modification mortgage outcomes. We find that principal reductions are particularly effective at improving loan outcomes, as high loan-to-value ratios are the single greatest contributor to re-default and foreclosure. However, any modification that reduces total payment and interest (P&I) reduces the likelihood of subsequent re-default and foreclosure. Modifications that involve increasing the loan principal -- primarily through capitalized interest and fees -- are more likely to fail, even controlling for changes in P&I.
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Michal Grinstein-Weiss et al.
Journal of Consumer Affairs, forthcoming
Abstract:
This study considers the impact of financial education dosage on savings outcomes of participants in Individual Development Account (IDA) programs. It analyzes data from a sample of approximately 2,000 participants in the American Dream Policy Demonstration, disaggregates outcomes by age, and uses propensity score modeling to control for endogeneity and selection bias. We find that, relative to counterparts who did not complete educational requirements, IDA participants who completed program requirements for financial education had higher average monthly savings, saved a higher portion of their income, and deposited savings more frequently. Notably, we find that participants aged 36 or older experienced increasing returns on investment in financial education, and the best outcomes are found among those with more than 200% of the required dose of financial education. However, younger participants with more than 100% of the required dose are found to experience a diminishing return on their investment in financial education.