Classes Of Borrowers Research Articles

The “New Normal” in Mortgage Lending and Its Impact on Default Probabilities

Abstract The paper analyses the evolution of the use of subprime loans and the availability of credit to different classes of borrowers. It examines the time period from 1980 to 2008 as a whole, as well as the changes in credit profiles in five sub-periods. By tracking borrower characteristics and their impact on foreclosure probability over time it determines what went wrong and how policy can be developed that prevents a repeat of the housing crisis that began at the end of 2006. The findings suggest that over the sample period debt to income, FICO score and loan-to-value are significant determinants for the probability of foreclosure and their importance increases over time. Furthermore, some borrowers are three times more likely to default on a loan originated between 2001 and 2006 than a loan originated between 1980 and 1994 indicating a distinct difference in lending terms and the general lending environment over time.

Non-parametric Predictive Inference for the Validation of Credit Rating Systems

SummaryCredit rating or credit scoring systems are important tools for estimating the obligor’s creditworthiness and for providing an indication of the obligor’s future status. The discriminatory power of a credit rating or credit scoring system refers to its ex ante ability to distinguish between two or more classes of borrowers. One of the most popular tools for the validation of the power of credit rating or credit scoring models to distinguish between two (or more) classes of borrowers is the receiver operating characteristic (ROC) curve (hypersurface) and its widely used overall summary, the area (hypervolume) under the curve (hypersurface). As the end goal of building such models is to predict and quantify uncertainty about future loans, prediction methods are especially valuable in this context. For this, non-parametric predictive inference is a promising candidate for such inference as it is a frequentist statistical method that is explicitly aimed at using few modelling assumptions, enabled through the use of lower and upper probabilities to quantify uncertainty. The aim of the paper is to introduce non-parametric predictive inference for ROC analysis within a banking context, for which novel results on ROC hypersurfaces for more than three groups are presented. Examples are provided to illustrate the method.

Loan Monitoring and Bank Risk

We study two issues: the relationship between loan monitoring and loan risk and the corporate value of banks' investments in loan monitoring systems. We find that dynamic monitoring of loans, where the bank is scanning in real time for events that may be of relevance to loan quality, tend to increase the incentive to hold risky loans, which in turn increases the regulatory burden for the bank. The profitability of improved monitoring must be balanced against the increase in the cost of regulation, and we show that the trade off is negative. This can explain the trend in banking of switching away from dynamic monitoring systems to credit scoring systems which use only currently available information to produce a signal of loan quality, without monitoring future events in real time. This matters in the sense that dynamic monitoring of loans can be efficient in assessing the credit quality of certain classes of borrowers -- the informationally challenging ones -- where credit scoring systems are relatively ineffective. We discuss the implications of this finding.

A decomposition approach to analysing racial and gender biases in Farm Service Agency's lending decisions

This study provides a different perspective in revisiting the racial and gender discrimination issue at the Farm Service Agency (FSA). Employing the Oaxaca–Blinder decomposition method, this study analyses disparities in approved loan amounts among racial and gender classes of borrowers. This study's results indicate substantial differentials in approved loan amount gaps between racial and gender classes, favouring white and female borrowers, respectively. Further scrutiny of the borrowers’ comparative financial conditions presented to FSA to support their loan applications, however, indicate that these borrower groups significantly dominate their peers in a number of measures that indicate their financial strengths and relatively greater capability to repay their future lending obligations. Hence, this study's results can hardly be construed as evidence of biased lending decisions as these borrower groups should rightfully be offered more favourable loan terms, such as larger loan amounts, by the FSA.

Does the Community Reinvestment Act (CRA) Cause Banks to Provide a Subsidy to Some Mortgage Borrowers?

The Community Reinvestment Act (CRA) encourages lenders to make mortgage loans to certain classes of borrowers. However, the law does not apply to all lenders, and lenders do not necessarily receive credit for all loans made to borrowers of a particular class. We use this variation to test whether or not CRA-affected lenders cut interest rates to CRA-eligible borrowers; in other words, we test for the presence of a regulation-driven subsidy. Our theory suggests that loans made by commercial banks and savings associations (``relationship lenders'') and mortgage companies (``transaction lenders'') will differ from one another depending on borrower risk and homeownership benefits. Empirically, we find that CRA-eligible loans at CRA-affected institutions do carry lower mortgage spreads compared with other loans at the same institution. However, once we control for risk and benefit effects suggested by our theory, these differences in mortgage spreads become economically and statistically insignificant.

Does the Community Reinvestment Act (CRA) Cause Banks to Provide a Subsidy to Some Mortgage Borrowers?

The Community Reinvestment Act (CRA) encourages lenders to make mortgage loans to certain classes of borrowers. However, the law does not apply to all lenders, and lenders do not necessarily receive credit for all loans made to borrowers of a particular class. We use this variation to test whether or not CRA-affected lenders cut interest rates to CRA-eligible borrowers; in other words, we test for the presence of a regulation-driven subsidy. Our theory suggests that loans made by commercial banks and savings associations ("relationship lenders") and mortgage companies ("transaction lenders") will differ from one another depending on borrower risk and homeownership benefits. Empirically, we find that CRA-eligible loans at CRA-affected institutions do carry lower mortgage spreads compared with other loans at the same institution. However, once we control for risk and benefit effects suggested by our theory, these differences in mortgage spreads become economically and statistically insignificant.

Financing Of Small And Medium-Size Enterprises In Cameroon

The study was conducted to determine the problems Small and Medium Size Enterprises (SMES) face in obtaining credits which could be a constraint to their creation and growth. Available data from the banking sector shows that as much as 78.7% of all commercial bank loans go to SMEs and large companies. This includes 86.2% of all medium term, 18.9% of all long term and 3.6% of all short term loans. SMEs and large companies pay back their loans better than the other classes of borrowers. Today the average loan repayment by all groups of bank clientele stands at 52.5% which is below World Bank standards. Even the SME loan repayment rate of 62.9% is still low by World Bank standards. From a survey conducted in the city of Douala in 1992, it was found out that the problem of SME financing in Cameroon today is not so much that of inadequacy of funds. Rather it is poor management of resources, the absence of collateral, and the absence of legality, which prevents many SMEs from obtaining loans from formal financing institutions. There is a lot of liquidity in informal financing houses but their lending is limited to members. The government must assist in creating and promoting a reliable environment informal banking institutions which will attract these funds from informal sources so as to make them available to a wider population of borrowers. To further improve on the financing environment of SMEs in Cameroon we may want to switch, from the so called hardware support approach to the software approach which facilitates access to money market information, research findings; which encourages linkages with large firms, within or out of the country; and finally, encourages the development of an entrepreneurial class. African Journal of Finance and Management Vol.9(2) 2001: 8-18

Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure

Implicit in option-pricing models of mortgage valuation are threshold levels of put-option value that must be crossed to induce borrower default. There has been little research into what these threshold values are that come out of pricing models or how they compare to exercised option values seen in empirical data. This study decomposes boundary conditions for optimal default exercise to look at the economic dynamics that should lead to optimal default timing. Empirical data on FHA insured mortgage foreclosures is then examined to discern the predictive influence of optimal-option-valuation-and-exercise variables on observed default timing and values. Interesting results include a new understanding of how to measure and use property equity variables during economic downturns, house-price index ranges over which default is exercised for various classes of borrowers, and implied differences in appreciation rates between market-price indices and foreclosed properties.

Monopolistic credit market in the conditions of imperfect information

Imperfect information in the monopolistic credit market could lead to the rejection of credit provision to some applicants for credit. The choice of which class of borrowers is rejected credit depends on the relations among some characteristics of borrowers. The inefficiency of credit market could be alleviated by government credit guarantees.

High-tech firms and credit rationing

Informational frictions between borrowers and lenders differ across classes of borrowers. Innovative firms undertake high-risk-high-return projects which are likely to be little understood by financial intermediaries. As a consequence, they may end-up allocating too large a share of funds to traditional, low-risk-low-return projects. This proposition finds some support in a cross-section of Italian manufacturing firms. Using several proxies to classify firms into high-tech and low-tech groups and direct information on each firm's access to bank credit, high-tech firms are found to be more likely to be credit-constrained than low-tech firms. The results suggest that the responsiveness of R&D expenditure to cash flow found in the literature is likely due to pervasive credit constraints on innovative firms rather than to cash flow proxying for future expectations. The paper also sheds light on the main factors affecting the probability of a firm being rationed in the credit market.

Horizontalism: a critique

This article offers a critique of the horizontalist view of money that banks are passive in the face of credit demand. It is argued that banks' liquidity preference influences their responsiveness to the demand for credit. Their liquidity preference is expressed in risk assessment (understood in terms of John Maynard Keynes's theory of uncertainty). It is argued that rationing in the sense of adverse changes in risk assessment occurs systematically in the downturn of the business cycle. Systematic rationing also occurs with respect to particular classes of borrowers; the focus here is on the case of small firms. (c) 1996 Academic Press Limited Copyright 1996 by Oxford University Press.

Interest rates in backward agriculture: the role of economic and extra-economic control

This paper examines the nature and roles of personalized control exercised by the rural moneylender over a class of poor borrowers to extract as much as possible in the form of high interest charges and income from undervalued and/or forfeited collaterals. Based on primary survey data from rural India, it analyzes the strategies adopted by the lender, through economic and extra-economic instruments, to enforce the credit contracts to accomplish his goals. It also provides a vivid picture of the variations in the level of interest rates and the reasons for it across a class of borrowers in the sample. Copyright 1990 by Oxford University Press.

A note on the factor-price frontier

For an economist the possibility of an upward sloping factorprice frontier is extremely surprising. It has been shown that although such a factor-price frontier is theoretically possible, it is not very likely that it can occur under given economic and technical conditions since it would imply that capitalists are a class of borrowers (from nature) whereas we can be fairly sure that they are a class of lenders.

The Personal Finance Business under Regulation

The borrower's first line of defense against the loan shark is the licensed personal finance company. This will be evident from the statistics which follow. They show that, to a far greater extent than any other cash-lending agency, the licensed personal finance company invades the loan shark's own territory. Indeed, it was for the express purpose of making this assault possible that the Uniform Small Loan Law was drafted thirty years ago. Further proof is furnished by the loan sharks themselves. They attack only the licensed lenders and the laws under which they operate. In Kentucky, the leaders among the loan sharks even went so far, in attempting to prevent passage of the Uniform Small Loan Law, as to say to their brethren, all know that such a law will put us all out of business. For the present purpose, therefore, in our discussion of money-lending under regulation, we shall deal mainly with licensed personal finance companies. There is, to be sure, one other rigidly regulated agency-the credit union-which also carries its offensive into the very fields where the illegal lenders do most damage. The credit union is indispensable. Every month it makes small loans to thousands of potential victims of the outlaws, and at rates substantially lower than this class of borrowers could get from any commercial agency. However, as shown in Chart I, the volume of business of personal finance companies is several times as large as that of credit unions. In any event, we cannot here cover the operations of all the regulated and partially regulated makers of consumer loans. We shall consider mainly that agency which now does the most, wherever the laws permit, to thwart the ancient practice of usury by providing a legal source of small loans. From the regulated personal finance companies more than two million individuals, in a few more than half the states, have borrowed money during the past year. Moreover, it seems probable that of all wage earners and of all families not living on farms, about one out of five obtained loans, within the past three or four years, from licensed personal finance companies.' The greater part of the business