High-risk Lending Research Articles

Do Lenders Still Monitor? Leveraged Lending and the Search for Covenants

It was once conventional wisdom that lenders routinely influenced corporate managers’ decision making. Covenants constrained borrower risk taking and compelled specific affirmative obligations to protect lenders. Recent policy discussion, however, laments loan markets’ turn to various forms of high-risk lending. So-called leveraged loans — relatively risky, below-investment-grade loans — more than doubled in outstanding dollar terms, growing from about $550 billion in 2010 to $1.2 trillion by 2019. These risky loans have taken up a larger and larger share of the loan markets over time. More leveraged loans are also “covenant-lite,” issued without traditional financial maintenance covenants. And regulators worry about “add-backs” — borrowers’ growing practice of making upward adjustments to projected earnings that tend to weaken leverage constraints. Moreover, bank regulatory changes have incentivized “originate-to-distribute” loan syndications that enable non-bank lenders to hold and trade leveraged loans too risky for banks to keep. Syndicated lending now involves greater and greater participation by nonbank or “institutional” lenders like hedge funds, CLOs (collateralized loan obligations), and mutual funds. Commentators worry about the new species of risky loans, with their dearth of traditional covenants and the fewer instances of lender intervention, which may portend instability in debt markets. At the same time, weakened covenant protections may lead to weakened corporate governance. In this Article, I respond to these fears, arguing that they may be overblown. The increasing share of leveraged and covenant-lite loans may not necessarily evidence undisciplined debt issuance. Many seemingly troublesome loans are issued as subparts of deals that include loans with traditional covenants and cross-default provisions, which effectively constrain borrower behavior. Though add-backs may increase firm leverage, they may also improve the informativeness of earnings-based financial covenants. In addition, while the incidence of loan covenant violations has dropped dramatically across U.S. public firms, recent research suggests that covenants have become more efficient. In effect, covenants are doing more with less. Financial covenants have generally become less restrictive and more discriminating in differentiating distress from non-distress situations.

Do Lenders Still Monitor? Leveraged Lending and the Search for Covenants

It was once conventional wisdom that lenders routinely influenced corporate managers’ decision making. Covenants constrained borrower risk taking and compelled specific affirmative obligations to protect lenders. Recent policy discussion, however, laments loan markets’ turn to various forms of high-risk lending. So-called leveraged loans — relatively risky, below-investment-grade loans — more than doubled in outstanding dollar terms, growing from about $550 billion in 2010 to $1.2 trillion by 2019. These risky loans have taken up a larger and larger share of the loan markets over time. More leveraged loans are also “covenant-lite,” issued without traditional financial maintenance covenants. And regulators worry about “add-backs” — borrowers’ growing practice of making upward adjustments to projected earnings that tend to weaken leverage constraints. Moreover, bank regulatory changes have incentivized “originate-to-distribute” loan syndications that enable non-bank lenders to hold and trade leveraged loans too risky for banks to keep. Syndicated lending now involves greater and greater participation by nonbank or “institutional” lenders like hedge funds, CLOs (collateralized loan obligations), and mutual funds. Commentators worry about the new species of risky loans, with their dearth of traditional covenants and the fewer instances of lender intervention, which may portend instability in debt markets. At the same time, weakened covenant protections may lead to weakened corporate governance. In this Article, I respond to these fears, arguing that they may be overblown. The increasing share of leveraged and covenant-lite loans may not necessarily evidence undisciplined debt issuance. Many seemingly troublesome loans are issued as subparts of deals that include loans with traditional covenants and cross-default provisions, which effectively constrain borrower behavior. Though add-backs may increase firm leverage, they may also improve the informativeness of earnings-based financial covenants. In addition, while the incidence of loan covenant violations has dropped dramatically across U.S. public firms, recent research suggests that covenants have become more efficient. In effect, covenants are doing more with less. Financial covenants have generally become less restrictive and more discriminating in differentiating distress from non-distress situations.

GENERALIZED AUTOREGRESSIVE CONDITIONAL HETEROSKEDASTICITY MODELING OF ONEYEAR MATURITY GOVERNMENT BONDS OF GREECE DURING SOVEREIGN DEBT CRISIS OF EUROZONE IN 2010

ination of international trade imbalances, the impact of the global crisis from 2007 to 2012, failure in bailout approaches of European governments that troubled banking industries and private bondholders, high-risk lending and borrowing policies enforced by unrestricted credit requirements during the period from 2002 to 2008 and fiscal policy choices related to government revenues and expenses. The objective is to model the boiling state of the Greek local financial market before the peak of the Sovereign Debt Crisis of Eurozone in 2009, modelling the insights of foreign investors and credit rating organizations. We will identify a set of primary risk factors and their effect on both the local economy and the markets involved to validate the analysis done. In this paper will use both statistical analysis and macroeconomic data modelling techniques to identify a set of primary risk factors or economic variables and their effect on both the local economy of Greece and the markets involved. The selected method of modeling is Generalized autoregressive conditional heteroskedasticity models. The research is based on the data provided by World Bank Data Portal. Results obtained are fitted of 2006-2009 years data Autoregressive Conditional Heteroskedasticity (ARCH) and Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models, forecasting market volatility in 2010 and on. We have discovered, that the Auto Regressive Integrated Moving Average model is not suitable for this problem as there was no notable autocorrelation. The volatility seems to fade out. This observation coincides with reality, as the crisis is about to peak and descend. Systemic risk indicators, primarily used for forecasting state-wide risk, are usually built on insider data of rating agencies or financial institutions. In this paper we obtain results close to Systemic Stress Indicator provided by European Central Bank (ECB) using ARCH and GARCH models on public data. The practical importance is model generation principle, which allows creating a risk indicator based on public financial data. Key words: economy, Single Financial Market, macroeconomic models, commodities prices, risk indicators.

The Geography of the Recent Housing Crisis: The Role of Urban Form

This study maps the geography of the recent housing crisis within and across American metropolitan areas, and evaluates how it is related to a series of spatial and socioeconomic variables at neighborhood and metropolitan levels. It finds that the spatial patterns of housing recessions vary widely by region. In general, fast-growing metropolitan areas in the Southwest and Florida experienced not only deeper but also longer housing recessions. In contrast, metropolitan areas in the South (except in Florida) saw shallower and shorter housing recessions. Metropolitan areas in the Midwest and Northeast had fewer price declines in the crisis, but their housing recessions tended to be longer. Housing recessions tend to be deeper and longer in larger metropolitan areas. Neighborhoods located closer to city centers experienced shallower and shorter recessions compared with those in fringe areas. Even after controlling for many other variables, automobile dependency is still a strong and positive predictor of housing recession depth and duration. The effects of other urban form variables, such as land-use density and mixed use, are mixed and vary by region. The significance of the effects of neighborhood demographic variables on recession depth is highly dependent on the inclusion of high-risk loan in the model, suggesting that predatory and high-risk lending is one major reason why lower income and minority neighborhoods were hit harder by the recent housing crisis. The effects of high-risk loan and neighborhood demographic variables on housing recession duration, however, are rather weak.

Third Party Funding of Personal Injury Tort Claims: Keep the Baby and Change the Bathwater

In the early 1990s, a period of high-risk lending at high interest rates, a new entrant emerged in civil litigation: the Litigation Finance Company (“LFC”). LFCs advance money to plaintiffs involved in contingency fee litigation. The money is provided on a non-recourse basis, meaning the plaintiff repays the LFC only if she obtains money from the lawsuit through a settlement, judgment, or verdict. If the plaintiff does not recover anything, she will not owe the LFC anything. When she does repay the LFC, however, she could end up paying as much as 280% of the amount advanced by the LFC. As one can see, LFCs make a lot of money. It is estimated that as of 2011, the total amount of outstanding advances exceeded $1 billion with $100 million being advanced annually. LFCs, like banks and credit card issuers, loan money to consumers with the expectation of being repaid the amount borrowed plus interest. Unlike banks and credit card issuers, however, LFCs are largely unregulated. The federal government does not regulate LFCs at all, and only Maine, Ohio, and Nebraska have enacted legislation regulating LFCs that operate in their respective states. What LFCs do is controversial, and the academic commentary about them is voluminous. Some commentators argue that LFCs should be abolished. Others say LFCs are the byproduct of willing sellers and willing buyers engaging in market transactions. Yet another group of commentators say LFCs serve a salutary purpose, but should be regulated like other entities that loan money to consumers. It is probably unrealistic to think that LFCs will be abolished, thus the question becomes whether they should be regulated, and if so, by whom. This paper posits that LFCs should be regulated by the Bureau of Consumer Financial Protection, the Federal Trade Commission, or both. Federal regulation is necessary in order to provide a uniform set of rules that provide protection to consumers while also allowing LFCs the freedom to provide the funding that consumers have shown they are willing to seek and accept.

Book Review: Foreclosed: High–Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

Book Review: Foreclosed: High–Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

Foreclosed. High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market - By Dan Immergluck; Managed by the Markets. How Finance Re-Shaped America - By Gerald F. Davis; The Ascent of Money. A Financial History of the World - By Niall

A review is presented for several books on housing finance, including Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market, by Dan Immergluck, The Ascent of Money: A Financial History of the World, by Niall Ferguson, and The Subprime Solution: How Today's Global Crisis Happened and What to Do About It, by Robert J. Shiller.

Foreclosed: High-Risk Lending, Deregulation and the Undermining of America's Mortgage Market. By Dan Immergluck. Ithaca, NY: Cornell University Press, 2009. 264p. $29.95. - Subprime Nation: American Power, Global Capital, and the Housing Bubble. By Herman M. Schwartz. Ithaca, NY: Cornell University Press, 2009. 280p. $65.00 cloth, $24.95 paper.

Foreclosed: High-Risk Lending, Deregulation and the Undermining of America's Mortgage Market. By Dan Immergluck. Ithaca, NY: Cornell University Press, 2009. 264p. $29.95. - Subprime Nation: American Power, Global Capital, and the Housing Bubble. By Herman M. Schwartz. Ithaca, NY: Cornell University Press, 2009. 280p. $65.00 cloth, $24.95 paper.

Book Reviews: Foreclosed: High-risk Lending, Deregulation, and the Undermining of America’s Mortgage Market Dan Immergluck, 2009 Ithaca, NY: Cornell University Press 272 pp. £16.50/US$29.95 hardback ISBN 978 0 8014 4772 3 hardback

Book Reviews: Foreclosed: High-risk Lending, Deregulation, and the Undermining of America’s Mortgage Market Dan Immergluck, 2009 Ithaca, NY: Cornell University Press 272 pp. £16.50/US$29.95 hardback ISBN 978 0 8014 4772 3 hardback

Cra’s “Blind Spots”: Community Reinvestment and Concentrated Subprime Lending in Detroit

ABSTRACT:As the mortgage crisis took shape by 2007, the Community Reinvestment Act of 1977 emerged at the center of a debate over whether community reinvestment regulations were perverse incentives promoting high-risk lending, or whether those regulations had become outmoded in the face of concentrated subprime lending. This paper weighs those arguments by examining the market behavior of lenders subjected to Community Reinvestment Act (CRA) as the subprime lending boom took shape after 2004. Using Detroit as an illustrative case, it empirically examines the market structure of high-cost lending, as well as the role played by CRA-covered lenders in the critical market segments most prone to concentrated subprime lending. The results suggest that several “blind spots” in CRA regulations weakened the Act’s ability to counter the firm- and neighborhood-level segmentation that characterized the growth of concentrated subprime lending in Detroit during the peak years of the housing boom.

The Denial of Debt: Understanding Margin Lending in Australia

A substantial body of research exists on the impact of high-risk sub-prime mortgages in the United States (U.S.) and on the 2008/09 global financial crisis. However, very little research has been devoted to other types of high-risk lending – such as margin loans – which allow investors to borrow against holdings in an investment portfolio to purchase additional investments. Therefore the aim of this exploratory study is to analyse the $19 billion Australian margin loan industry and to examine if margin loan investors, when faced with an investment loss situation such as a margin call payment, denied or accepted the threat of debt. Using a quantitative design method, data was collected through an online survey from over 105 Australian financial advisers using margin loans. Results indicated that 55% of financial advisers reported that their margin loan investors as having a concerned response in a loss situation (a margin call), while 45% of financial advisers reported their investors as having a calm response (inferring denial-like behaviours). We further explored different types of denial and found that smaller financial planning practices with less than 20 investors were less likely to have concerned investors in a margin call event. A key limitation is that denial is a very complex concept to measure, therefore the generalizability of the findings cannot be guaranteed. However, the findings provide implications for Australia’s new responsible lending legislation and an original insight, as we believe this is the first study on margin loans and denial of debt in Australia. This is expected to broaden the literature for financial services, banking, marketing and psychology.

Book Review: Immergluck, D. 2009. Foreclosed: High-risk lending, deregulation, and the undermining of America’s mortgage market. Ithaca, NY: Cornell University Press. 251 pp. $29.95 hardcover. ISBN: 978-0-8014-4772-3

Book Review: Immergluck, D. 2009. Foreclosed: High-risk lending, deregulation, and the undermining of America’s mortgage market. Ithaca, NY: Cornell University Press. 251 pp. $29.95 hardcover. ISBN: 978-0-8014-4772-3

Reviews: Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

Reviews: Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market

Dan Immergluck. Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market. Ithaca, NY: Cornell University Press, 2009. x + 251 pp. ISBN 978-00-8014-4772-3, $29.95.

Dan Immergluck. Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market. Ithaca, NY: Cornell University Press, 2009. x + 251 pp. ISBN 978-00-8014-4772-3, $29.95. - Volume 10 Issue 4

Foreclosed: high-risk lending, deregulation, and the undermining of America's mortgage market

Foreclosed: high-risk lending, deregulation, and the undermining of America's mortgage market

From the Subprime to the Exotic: Excessive Mortgage Market Risk and Foreclosures

Problem: The recent rapid growth of high-risk mortgage lending raised the financial risk profile facing not only the American homeowner but entire neighborhoods. From the perspective of planners, the problem of increased and geographically concentrated foreclosures is the most critical outcome that has resulted from high-risk mortgage markets. Purpose: This article analyzes recent trends in mortgage finance in order to recommend what local planners can do to reduce the negative consequences of high-risk home lending for their own communities. Methods: I plot public and private data, much of it readily available for little or no cost, to discover where in the nation recent mortgage foreclosures are concentrated, and describe how similar analysis could be used prospectively and at a local scale to anticipate future problems. Results and conclusions: Numbers of subprime, exotic, and zero-down-payment mortgages have all been growing. Where they are spatially concentrated they are linked to rising and geographically concentrated home mortgage foreclosures. I find evidence that subprime lenders achieve greater market penetration in metropolitan areas with less educated residents, and that higher-risk lending is more prevalent where housing prices are high and increasing. I also find that when local housing markets are hot, even high levels of subprime lending are associated with only slightly higher foreclosure filing rates, but foreclosure rates rise quickly when hot markets cool. Takeaway for practice: Although foreclosures are less likely to be a severe problem in very strong real estate markets, when prices in previously hot markets stagnate or decline, foreclosures can quickly follow. This is a serious concern given recent trends in mortgage financing that have extended credit to more economically vulnerable populations and generally weakening housing markets in many metropolitan areas. These foreclosures tend also to be spatially concentrated within metropolitan areas, particularly stressing housing markets in neighborhoods where the higher-risk products are more prevalent. I recommend that planners: (1) track local lending and foreclosure patterns; (2) promote healthier mortgage markets in vulnerable areas; (3) fund targeted foreclosure prevention and counseling; (4) develop refinancing/restructuring programs; (5) redesign programs to promote sustainable homeownership; (6) get foreclosed properties reoccupied quickly; (7) recognize the effect of foreclosure surges on rental housing markets; and (8) be proactive in policy debates on lending regulation and foreclosure processes. Research support: None.

Geographies of mortgage market segmentation: the case of essex county, new jersey

Since the late 1980s, mutually reinforcing trends in economic growth, public policy, and community activism have fostered a wave of residential mortgage lending to ‘underserved markets’ in US cities. Yet many of the changes in housing finance that supported sustainable home ownership also lured a new generation of subprime and predatory credit institutions specialising in high-cost, high-risk lending. For many urban and minority neighbourhoods, the old problems of exclusionary redlining are now accompanied by new dilemmas of exploitive greenlining. This paper analyses the market penetration of subprime lending institutions and the subsequent concentration of mortgage ‘pre-foreclosures’ in low- and moderate-income, African American neighbourhoods. Focusing on Newark, NJ, and its surrounding suburbs, Gary King's ecological inference technique and a series of logistic regression models are used to assess the role of borrower characteristics, institutional divisions, and neighbourhood context in the process of mortgage market segmentation. The evidence corroborates theories emphasising the dynamics of capital investment, financial services restructuring, and the economic incentives for racial-geographic targeting, and not the presumed credit deficiencies of urban and minority home owners. Unfortunately, the tidy empirical analysis offered here is overshadowed by the enormous societal experiment now underway across the US, as a wave of delinquencies, defaults and foreclosures undermines the belated minority home ownership gains achieved during the unprecedented boom of the 1990s.