Government Mortgage Research Articles

Consumption Demand and Wealth Effects of Unorthodox Monetary Policy

Unorthodox monetary policy invented by Ben Bernanke to stimulate the real economy towards a higher growth and employment path uses huge amounts of money to buy up assets on the capital market in particular government bonds and mortgage backed securities. This kind of monetary action was named by Bernanke QE, i.e. quantitative easing. The channel through which QE should operate is on the one hand the lowering of the yield curve to ease credit financing and refinancing in particular and on the other hand through the wealth effect on consumption demand. The latter should stimulate aggregate consumption through the well known real-balance effect first introduced into the Keynesian consumption function by Don Patinkin. However, there seems empirical evidence that both channels are not working as expected. After three QE periods, in particular the last QE did not lower the yield curve anymore. Additionally the wealth effect on aggregate consumption seems as well non-existent. There is no visible positive effect observable that QE has led to a higher economic growth or accelerated the decline of the unemployment rate. However, it creates a legacy of about 2.5 trillion US-Dollar of additional liquidity over the three rounds of QE. This poses a major dilemma for an exit from QE. If inflation expectations are rising and triggering higher inflation without having accomplished a higher sustainable growth and employment path of the economy, the central bank face the dilemma of fighting inflation and face huge losses on its balance sheet from those assets bought over the QE period or hedging their balance sheet and let inflation accelerate beyond its previous target. A soft landing of an exit from QE becomes highly improbable because the market reactions will tend to overshoot as soon as the central banks begin to commit towards a QE exit policy. Contrary to Milton Friedman’s recommendation for a steady monetary policy oriented towards a long-term real growth trajectory, the activist policy of QE creates endogenous boom and bust cycles.

The Downs and Ups of FHA Lending: The Government Mortgage Roller Coaster Ride

Throughout the last decade, mortgage markets experienced both a considerable decline and a considerable increase in the share of the market served by the FHA. Concerns have grown about the solvency of the program and about the access to credit of the borrowers served by the FHA market. These concerns are due, at least in part, to the evolving distribution of loans in the FHA portfolio and uncertainty about future patterns of lending. This paper attempts to explain FHA lending patterns over the past decade, particularly the dramatic downs and ups of FHA lending. We pay particular attention to the drivers of these changes, and the implications of these changes for FHA lending, mortgage markets, and associated public policy initiatives.

Broker Compensation Patterns and Trends: 2005–2009

Changes in the mortgage industry have been swiftly effected over the past few years. Many of the changes have come about as a response to the high level of observed delinquencies and defaults on residential mortgages as house prices plummeted, and others have evolved from continuing concerns about the treatment of borrowers during the mortgage origination process. The segmented mortgage industry of the early part of the decade, with loans being originated in the prime, subprime and government mortgage sectors, has been largely replaced with a bifurcated system. By year end 2010, the FHA/VA (government sector) combined with the conventional, conforming market share of originations was 90.8 %. In this paper, we examine some of the observed trends and changes in the types and levels of broker compensation that existed before the regulatory change that brought about the implementation of the Federal Reserve Board’s (FRB) new loan officer compensation rule. Among other questions, we examine the variance in broker compensation across geographies, across lenders, across borrower types, and across loan products. The intent of this ex post analysis is to provide an understanding of the potential impacts of the declining broker industry on both access to mortgage loans and on the pricing of mortgage originations.

Housing Finance Reform: Private Markets Versus Government Guarantees

This paper evaluates the major alternative proposals for reforming the U.S. home mortgage market assuming that the government sponsored enterprises (GSEs), Fannie Mae and Freddie Mae, will be closed. The paper compares proposals that advocate primary reliance on private markets to take on the GSE functions with proposals that advocate government mortgage guarantees, including a discussion of how these plans differ in terms of duration, scope, and risk-sharing. The paper concludes with a discussion of current government attempts to expedite the modification or refinancing of existing mortgages, including a plan for the transition from the current situation to the long-term reforms.

How Do Mortgage Subsidies Affect Home Ownership? Evidence from the Mid-Century GI Bills

The largest twentieth-century increase in US home ownership occurred between 1940 and 1960, associated largely with declining age at first ownership. I shed light on the contribution of coincident government mortgage market interventions by examining home loan benefits granted under the World War II and Korean War GI Bills. Veterans' benefits increased home ownership rates primarily by shifting purchase earlier in life, explaining 7.4 percent of the overall 1940–1960 increase, and 25 percent of the increase for affected cohorts. A rough extrapolation suggests that broader changes in mortgage terms can explain 40 percent of the 1940–1960 increase. (JEL G21, N22, N92, R21, R31)

Why Is Taiwan’s Homeownership Rate So High?

With an annual growth rate of 0.62 per cent since 1980, Taiwan’s homeownership rate reached 88 per cent in 2007. This study explores possible causes of Taiwan’s high homeownership rates. The institutional and economic context for tenure choice in Taiwan is reviewed, paying particular attention to the taxation and financing of owner-occupied housing, house prices relative to rents, housing subsidies and housing demand. A model of tenure choice is estimated and then used to simulate policy and other changes. It is concluded that Taiwan’s high rate of homeownership is due primarily to the low user cost of owner-occupied housing, which is due in part to house price inflation. Government mortgage subsidy policies designed to support ownership appear to have little effect.

Three Initiatives Enhancing the Mortgage Market and Promoting Financial Stability

Abstract In recent years, the government has greatly extended its reach into the mortgage markets with the goals of (1) mitigating the deadweight losses associated with mortgage foreclosures, (2) promoting affordable homeownership, and (3) providing low cost mortgage financing. In this paper, we identify three innovations-one in each of these areas-that could be made to the American mortgage market that would help obtain the government's objectives while enhancing financial market stability-particularly if all are done together. These three innovations are: (1) “buy your own mortgage" options, (2) variable maturity mortgages, and (3) creation of a government mortgage bond insurer, with an emphasis on insuring covered bonds as well as GSE debt. The first innovation would allow homebuyers to repurchase their mortgage at the “market value" of their homes when they move, thereby helping society avoid some of the deadweight losses associated with unnecessary foreclosures. The second innovation would provide a mortgage that could promote affordable housing without unduly raising the default risks of low- and moderate-income families. The third innovation would help create a variety of financing options for mortgages in the United States. Moreover, it could be integrated into the current system of mortgage financing, which would include government-sponsored enterprises (GSEs), in a manner that would help the government manage the systemic risks associated with the quasi-government backing of mortgage credit and mortgage insurance. In particular, we propose that the government explicitly insure pre-designated financial instruments used to fund mortgage credit (such as covered bonds and GSE debt) by creating a government-backed insurance fund similar to that currently used for deposits.

The Government Mortgage Guarantee as an Instrument in Housing Policy: Self-supporting Instrument or Subsidy?

This paper discusses the role of government mortgage guarantee schemes in housing policy. It explores different types of government mortgage guarantee scheme, which play different roles, in eight countries. Mortgage guarantee schemes interfere in the mortgage market in order to improve access to mortgages. Such guarantees can be shaped as self-supporting instruments or as subsidies. If the latter is the case the issue of competition and a level playing field is relevant. This paper explores the US and the Dutch guarantee models in depth in order to answer the question of whether these schemes are unsubsidised mortgage market instruments or subsidised programmes. It concludes by reflecting on the meaning of the outcomes in the context of EU competition policy.

Home ownership into the new millennium: A view from the margin

The late 1990s saw the beginnings of a decline in Australia's high rate of home ownership. This trend, especially among younger people, appears to be driven by a complex of economic, social and demographic forces. The paper looks at this development from one specific viewpoint: the phenomenon of mortgage default. Recent data suggests a rise in the number of people falling into arrears on their mortgages, in some cases to the point of default. The paper surveys this outcome and analyses the factors responsible. Data drawn from the experiences of a state government mortgage lender is used to test the factors isolated in the literature as significant in this respect.

Distribution of Credit Risk Among Providers of Mortgages to Lower-Income and Minority Homebuyers

Which institutions bear the credit risk for mortgage lending to lower-income and minority borrowers and in lower-income and predominantly minority neighborhoods? In seeking to answer those questions, the authors went beyond looking at mortgage credit risk in terms of numbers or amounts of loans and developed measures based on factors that affect the riskiness of loans, including loan-to-value ratios and associated default and loss severity rates. In 1995, a nonprofit government mortgage insurer, the Federal Housing Administration, was the major bearer of credit risk for mortgage lending to these groups. The amount of credit risk borne by the profit-seeking originators, insurers, and purchasers that finance conventional mortgages was small in comparison, and the risk was widely distributed among different types of institutions.

Lying during crisis negotiations: A costly means to expedient resolution

#1 After being confined to a wheelchair for over eleven years, a twenty-eight-year-old paraplegic attempts to quell his overwhelming anger with alcohol. The beautiful spring afternoon is no consolation for the man who, at the age of seventeen, permanently lost the use of both legs. Paralyzed after being thrown from a car which hit a tree, the man continues to blame the driver and the owner of the vehicle, both childhood friends, for the accident that occurred during a night of youthful recklessness. Driven beyond rationality by the combination of anguish and alcohol, the man gathers two handguns and nearly two hundred rounds of ammunition. Using his specially equipped car, the man goes to the residence of one of those he holds accountable for the accident. After calling the man from his house, the paraplegic fires nine shots at him. Two bullets hit the intended target. The near fatally wounded man is then held hostage while lying face down on the sidewalk in his quiet residential neighborhood. In a frenzy of emotion, the enraged paraplegic fires additional shots into the air while proclaiming, It's the end of the world. He then repeatedly threatens to kill the victim and himself. #2 A thirty-eight-year-old man with a history of mental instability becomes increasingly despondent over the threat of foreclosure on his government mortgage. Seeking relief, the man has several drinks and then makes numerous calls from his home to government officials. The agencies called, including the governor's office, systematically dismiss his drunken ranting. In a state of hopelessness, the man telephones a major metropolitan news station and advises them he is going to commit suicide over the bureaucratic dispute. Local police are notified and, upon responding to the scene, are confronted by the subject wielding a rifle at a second-story-window. One police officer is cornered in a vulnerable position outside the residence. #3 Late afternoon on a clear and windy April day, a distraught twenty-two-year-old man climbs the stairwell of a hospital parking garage. Upon reaching the rooftop level, he perches on an outdoor ledge seven stories above a parking lot. Unsteady from alcohol, the man threatens to jump. The subject holds hospital security guards and mental health professionals at bay and cites problems with his estranged wife as his motivation. In addition, the irrational man screams about emotional pain, death, God, patriotism, and communists. #4 At 11:15 pm on a cool spring evening, an undercover narcotics officer leaves his office on a motorcycle enroute to meet friends. Three drug dealers in a utility vehicle ram the rear of the cycle in an attempt to stop it. The carjackers then fire shots at the officer. Fortunately, a protective helmet absorbs the bullet striking his head, and he suffers only a minor injury. The utility vehicle is found minutes after the attack parked behind the apartment of the suspected driver. Police immediately surround the apartment. The preceding crises are not fictional. They are actual occurrences to which this writer has responded as a crisis-hostage negotiator with a Critical Incident Team (formerly SWAT) in the Philadelphia-Southern New Jersey area. They are typical of many incidents encountered nationwide by law enforcement officers. Over the years, police have responded to such critical incidents with various tactics, many resulting in the needless loss of life. Today, most modem police responses are geared toward resolving incidents as quickly and safely as possible through negotiation. While this has proven successful, caution must be exercised since, for the sake of expediency, authorities may be tempted to resort to deception in order to achieve a peaceful resolution. Superficially, one may reason that lying to defuse a life-threatening situation is permissible, or even desirable, if it works. But there may be significant costs, especially over the long term, if the police engage routinely in the deceptive practice of lying to secure a favorable resolution. …

State Foreclosure Laws, Risk Shifting, and the Private Mortgage Insurance Industry

State Foreclosure Laws, Risk Shifting, and the Private Mortgage Insurance Industry ABSTRACT The large losses suffered by private and government mortgage insurers during the last several year has renewed in identifying the risk factors associated with residential lending. This paper focuses on the effect of state foreclosure laws on that risk. Data on loss rates incurred by PMIs over the period 1980-1986 reveal that a judicial foreclosure requirement and a statutory right of redemption add significantly to mortgage risk. Anti-deficiency judgment statutes preclude the amelioration of such risk. Estimates of the losses due to such laws are included Introduction One result of the mid-localized recessions in the agricultural and oil sectors of the economy has been an increase in residential loan defaults and foreciosures. Both government (FHA and VA) and private mortgage insurance (PMI) company claims have risen sharply since the early 1980s. (1) In 1986 the combined ratio of the loss and expense ratios for all PMI's was a record 168.9 percent. By comparison, the ratio was only 55 percent in 1979. Direct losses paid as a percent of the previous year's risk in force were .17 percent for 1980 and 1.35 percent for 1986. By 1986 the weighted average risk-to-capital ratio for the industry reached a record 25.8:1, several companies required capital infusions from their parent companies, and others had their ratings reduced by the rating agencies. (2) Besides localized recessions, other frequently noted risk factors have been mentioned as deepening the financial difficulties of the PMI industry. They include the introduction of new loan types (negatively amortizing Arms and GPMs), an increase in insured investor (non-owner occupied) properties, and a greater proportion of over-90 percent loan-to-value ratio loans originated by lenders. The consensus appears to be that the PMI industry failed both to adequately underwrite the risks associated with the characteristics of loans they insured and to charge premiums which reflected those risks. Throughout the early and mid-1980s, PMI companies charged uniform premiums regardless of the loan's characteristics, including location of origination. (3) It should not be surprising that in the fact of uniform premiums, differential amounts of risk were shifted to the insurers. Among the risks that may have been differentially shifted, there is one that has received little attention in the literature. That is the risk associated with the legal structure of the default-foreclosure process of the state within which the mortgaged property is located. This structure varies dramatically. The laws in some states facilitate the foreclosure process and thereby ameliorate lender-insurer losses. The laws in others, in an attempt to provide greater protection to the mortgagor, cause the process to be more lengthy and costly. This study demonstrates the extent to which different foreclosure laws create loan risk differentials which have been refelected in the losses of private mortgage insurers. The period of the interest is 1980 through 1986. (4) The manner in which state foreclosure laws affect residential loan risk is briefly discussed. A model is then presented wherein this risk is shifted disproportionately to private mortgage insurers that charge uniform premiums. Empirical evidence then shows that such risk caused substantial losses for PMI's from 1980 through 1986. Findings are then summarized and suggestions for future research are offered. State Foreclosure Laws and Loan Losses (5) Aside from minor differences, there are three primary distinctions in state foreclosure laws. They all affect the size of residential loan losses. First, states are almost equally divided between those that employ a judicial foreclosure procedure and those that employ a power-of-sale procedure. …

CREDIT AVAILABILITY AND ECONOMIC DECISIONS: SOME EVIDENCE FROM THE MORTGAGE AND HOUSING MARKETS

THE CONJECTURE that plays an important role in decisions to purchase or consume recurs frequently in discussions of monetary policy, banking markets and consumption or investment decisions. Repetition of the phrase and of in official statements strengthens the impression that cost and have separable and independent effects on decisions to consume or invest. A large literature develops this theme.1 A common starting point of the argument is the observation that lenders use ''non-price rationing-terms and of the loan contract-to allocate loans. One interpretation of the observation is that the theoretical terms price and have many dimensions, so the cost per unit time paid by the borrower includes more than the explicit rate of interest written in the loan contract. That this is not the only, or even the principal, interpretation is clear from the many proposals to offset the effects of non-price rationing or availability conditions by government action. Many of the Federal government's programs have this rationale. Although is invoked to rationalize many phenomena, the argument has had greatest influence on and legislation to encourage housing. Much policy in the U.S. and in Western Europe is policy. The avowed purpose of the policies is to encourage the production of housing by increasing the of mortgage credit. The increased is financed by issuing bonds. General economic theory suggests that changes in the composition of financial assets-e.g., a sale of bonds and a purchase of mortgages-can affect the composition of real assets and spending decisions only by changing relative prices and the market value of wealth. Elsewhere [Arcelus and Meltzer, 1973], I have argued that there is no evidence of any effect of mortgage or on the number of houses produced or purchased if proper allowance is made for the method of financing the government's mortgage program. Specifically, the effect on housing of financing the mortgage purchase (or sale) offsets the effect of the increased (or reduced) of in the form of mortgages. The paper examines two additional types of evidence on availability. One comes from data on wealth and the composition of assets and liabilities. If the form in which credit becomes available affects the composition of spending, the large increase in mortgage relative to wealth or other liabilities

Federal Mortgage Interest Rate Policy and the Supply of FHA-VA Credit

IN recent years, the underwriting of residential mortgage loans by the Federal Housing Administration (FHA) and Veterans Administration (VA) has become an increasingly important device for implementing federal housing policy.' The government's assumption of the major risks of mortgage default through FHA insurance and VA guarantee has encouraged private lenders to extend loan terms that have greatly magnified the purchasing power of the house buyer's down-payment and monthlypayment dollars. The resulting ability of the government to augment and channel effective demand has been used in various ways. Aggregative policies have been aimed at improving national housing standards by stimulating a high level of residential construction and widening the private industry's market. Special programs have been designed to place certain groups in preferential market positions. Veterans, owners wishing to rehabilitate deteriorated properties, and low income families displaced by slum clearance projects are examples of such groups. Throughout the postwar period, however, these programs have been hampered by intermittently recurring credit shortages, particularly those programs which depended on the more liberal-term loans. Such shortages were most acute in I948-49, I95I-53, and I956-57, and in areas farthest removed from the money markets of the Northeast. In each instance the credit difficulties have resulted in widespread controversy over the federal government's mortgage interest rate policy. On both insured and guaranteed loans, the government has established the maximum interest rates which may be charged the borrower. The principal aim has been to fix a rate which would reduce as far as possible the costs of home financing and at the same time encourage a satisfactory volume of private lending. Such encouragement is of the utmost importance, since normally both the FHA and VA rely fully upon private lenders for the provision of insured and guaranteed credit. This article undertakes to analyze the relationship between FHA-VA interest rates and the supply of insured and guaranteed mortgage funds. Based on an analysis of the postwar experience we shall attempt to determine the degree to which the government's mortgage interest rate policy can augment the supply of these funds and what constitutes an effective policy for this purpose given the twin objective of reducing home financing costs.

The Impact of Federal Mortgage Insurance Programs on Ann Arbor's Home Mortgage Market, 1956

The Impact of Federal Mortgage Insurance Programs on Ann Arbor's Home Mortgage Market, 1956

Government Mortgage Credit Commitments and Economic Stability

Government Mortgage Credit Commitments and Economic Stability

Government and Private Mortgage Loans on Real Estate

Government and Private Mortgage Loans on Real Estate