Marginal Borrowers Research Articles

Crowdlending, Self-Employment, and Entrepreneurial Performance

Access to finance is crucial for sustaining entrepreneurial activity. Elaborating on resource dependence theory, we argue that the adverse impact of a loan rejection by a crowdlending platform is more severe than that of a rejection by a traditional financial institution. The data indicate that a failed crowdlending loan attempt is associated with a 14.80% increase in the probability of transitioning out of self-employment. This effect is 1.62 times that of revolving lines of credit and 3.08 times that of non-revolving lines of credit. We highlight that these effects are amplified for marginal borrowers and credit- and income-constrained entrepreneurs. In addition, we show that successful crowdlending enhances self-employed individuals’ future income and future access to traditional lines of credit. Implications for policy and practice are discussed.

Peer-to-Peer Lending as a Determinant of Federal Housing Administration-Insured Mortgages to Meet Sustainable Development Goals

In this paper, we investigate the influential factors of Federal Housing Administration (FHA) mortgage loans, focusing our research interest on peer-to-peer (P2P) lending, the most successful FinTech lending model. We consider P2P lending an alternative source of financing that marginal borrowers use to pay the increased mortgage down payment, making them eligible to receive a mortgage from conventional banks. In other words, we examine whether and to what extent P2P lending has a positive impact on the FHA loans volume by providing the ability to circumvent the loan-to-value (LTV) cap policy. As a result, P2P lending can be seen as a means for ”rationed” borrowers to have access to the market by reducing inequalities and promoting financial inclusion, thus achieving Sustainable Development Goals (SDGs). We employ hand-collected data from FHA mortgages, P2P loans, and other economic factors from all 50 U.S. states during 2007–2017 and use panel data techniques for this purpose. Research shows that P2P lending, GDP per capita, population growth, broad money growth rate, interest rate, unemployment rate, new housing units, and consumer confidence Index produce effects on FHA loans. We show that P2P lending, a nonconventional determinant, is causally associated with a significant increase in the count and volume of FHA loans, implying that P2P lending has a positive impact on them. The ability of P2P to bypass mortgage supply constraints (tightened LTV caps) by providing small loans to borrowers to meet the increased down payment requirements is very important to policy-makers, as it shows that constraining the volume of mortgage loans may be not achieved. Macroprudential tools designed to control credit growth may prove ineffective, as the use of alternative forms of lending helps circumvent them and ultimately leads to excessive household leverage with all the risks that it poses to the financial system.

The impact of bank regulation on the cost of credit: Evidence from a discontinuity in capital requirements

We study the effect on credit relationships of the Small and Medium Enterprises Supporting Factor (SME-SF), a regulatory risk weight reduction on small loans to SMEs. Employing a regression discontinuity design and matched bank-firm data from Italy, we find that a 1 percent drop in capital requirements causes an average 13 basis points reduction in the cost of credit. Moreover, with a novel measure of bank regulatory capital scarcity, we show that the drop is larger for banks facing tighter constraints. Furthermore, the drop is larger for firms with low switching costs, while the sharp assignment rule may have led to the rationing of marginal borrowers. Such findings indicate that the entire distribution of firms and banks’ characteristics plays a crucial role in determining the impact of regulatory capital changes.

Are mergers among cooperative banks worth a dime? Evidence on efficiency effects of M&As in Italy

We study the intense wave of mergers among Italian mutual cooperative banks (Banche di Credito Cooperativo, BCCs) trying to assess whether those mergers were efficiency-enhancing. Specifically, we employ a two-step procedure: first estimating bank-level cost efficiency scores over 1993–2013 via a stochastic frontier approach, then trying to explain the estimated BCCs' scores with a set of merger status dummies (never merged, before the first merger, merged once, merged twice, etc.) and a vector of control variables. We find that mergers increase mutual banks' cost efficiency only in 5% of the mergers, precisely those in which a BCC has merged at least three successive times with other BCCs. Besides, we conjecture that the serial mergers led those BCCs to reach remarkably large size and this could harm especially marginal borrowers (i.e. those likely served by smaller banks but neglected by bigger ones), with strong adverse impact on development and inequality and violating BCCs' ethics and mission.

The Role of Technology in Mortgage Lending

Technology-based (``FinTech'') lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20% faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.

Hedge fund leverage: 2002–2017

AbstractUsing a large panel data set, we investigate the dynamics of hedge fund leverage from 2002 to 2017 and find considerable variations in both time series and cross section. More than 70% of hedge funds use leverage and almost half of the leveraged funds are levered through margin borrowing. On average, hedge funds decreased leverage prior to the beginning of the financial crisis, with leverage remaining below the pre‐crisis levels. We find that the level of leverage and its changes are related to fund characteristics such as age, governance, performance, risk, fees, liquidity, survival, and the birth of a new fund.

A Mathematical Demonstration of the Viability of Profit/Loss Sharing as a Debt Alternative in Presence of Market Frictions

We posit a simple mathematical model to show that a profit-and-loss sharing contract can be formed between a capital seeker and capital provider as a potential alternative to institutional debt financing. The major methodological tool used is that of Nash bargaining; utilising the matching theory proposition of Pissarides (2000). Our posited model demonstrates that a ‘match’ between a capital seeker and a capital provider can occur even in the presence of embedded market frictions arising out of information asymmetries as are especially rife in the emerging markets. This is an important result especially for marginal borrowers in emerging economies and we present supporting empirical evidence that indicates profit-and-loss sharing being increasingly seen as an effective alternative financing to long-term borrowing. JEL Classification: C78, D53, G23

What Fueled the Financial Crisis? An Analysis of the Performance of Purchase and Refinance Loans

There is a good deal of debate on the causes of the housing crisis. Using Freddie Mac and Fannie Mae loan-level data, this article compares the default and loss behaviors of purchase, rate refinance, and cash-out refinance loans. The authors’ results show that cash-out refis have the poorest performance, especially during the financial crisis. Purchase loans exhibit much better performance than rate refis before and during the financial crisis; this pattern is weaker thereafter. Furthermore, they also show that loan performance of first-time homebuyers is similar to that of repeat buyers. This evidence indicates that the expansion of lending to include more marginal borrowers may not be the main cause of the financial crisis. Instead, the poor performance of the cash-out refis, and refis more generally, is a more important contributing factor.

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The Role of Technology in Mortgage Lending

Technology-based (FinTech) lenders increased their market share of U.S. mortgage lending from 2% to 8% from 2010 to 2016. Using market-wide, loan-level data on U.S. mortgage applications and originations, we show that FinTech lenders process mortgage applications about 20% faster than other lenders, even when controlling for detailed loan, borrower, and geographic observables. Faster processing does not come at the cost of higher defaults. FinTech lenders adjust supply more elastically than other lenders in response to exogenous mortgage demand shocks, thereby alleviating capacity constraints associated with traditional mortgage lending. In areas with more FinTech lending, borrowers refinance more, especially when it is in their interest to do so. We find no evidence that FinTech lenders target marginal borrowers. Our results suggest that technological innovation has improved the efficiency of financial intermediation in the U.S. mortgage market.

Do Local Capital Market Conditions Affect Consumers’ Borrowing Decisions?

This paper uses detailed data from an online peer-to-peer lending intermediary to test whether local access to finance affects consumers’ willingness to pay for loans. After controlling for local economic conditions and borrower credit quality, we find that borrowers who reside in areas with good access to bank finance request loans with lower interest rates. This effect is stronger for borrowers with poor credit and those seeking small loans, suggesting that local access to finance is more important for marginal borrowers. Overall, our findings shed light on how consumers substitute between alternative sources of finance. This paper was accepted by Wei Jiang, finance.

Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005

Treating fraudulently overstated income on mortgage applications as true income can lead to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005. A positive gap between zip-code-level income growth calculated from mortgage applications and income growth from the IRS likely reflects mortgage fraud, not an improvement in home-buyer income. In support of the credit supply view, mortgage credit for home purchase expanded significantly more in low-credit-score neighborhoods on both the extensive and intensive margins from 2002 to 2005, even though these neighborhoods deteriorated on many measures of income prospects.

Are Mergers among Cooperative Banks Worth a Dime? Evidence on Post-M&A Efficiency in Italy

In this paper we study the intense wave of mergers among Italian mutual cooperative banks (Banche di Credito Cooperativo, BCCs) and try to assess whether those mergers were efficiency-enhancing. For the purpose, we employ a two-step procedure: we first estimate bank-level cost efficiency scores for a large sample of Italian banks in the period 1993-2013 by means of a stochastic frontier approach, then we try to explain the estimated BCCs’ cost efficiency with a set of merger status dummy variables (never merged, before the first merger, merged once, merged twice, etc.) as well as with a vector of control variables. We find that mergers increase mutual banks’ cost efficiency only after a BCC has merged at least three successive times with other BCCs, hence after reaching a remarkably large size. However, we conjecture that this growth in size could harm especially marginal borrowers (i.e. those who are likely to be served by smaller banks but neglected by bigger ones), with a strong and adverse impact on development and inequality and in contrast with BCCs’ ethics and mission.

Fraudulent Income Overstatement on Mortgage Applications During the Credit Expansion of 2002 to 2005

Treating fraudulently overstated income on mortgage applications as true income leads to incorrect conclusions on the nature of the mortgage credit supply expansion toward marginal borrowers from 2002 to 2005. A positive gap between zip-code level income growth calculated from mortgage applications and income growth from the IRS likely reflects mortgage fraud, not an improvement in home-buyer income. In support of the credit supply view, mortgage credit for home purchase expanded significantly more in low credit score neighborhoods on both the extensive and intensive margin from 2002 to 2005, even though these neighborhoods deteriorated on many measures of income prospects.

The role of training in reducing poverty: the case of agricultural workers receiving microcredit in Bangladesh

The policy of providing microcredit and skill training to poor agricultural workers in developing countries is well‐established. In this study, an attempt has been made to assess the effectiveness of the training part of that policy. BRAC (formerly the Bangladesh Rural Advancement Committee), the largest non‐governmental organization in Bangladesh, is making efforts to alleviate poverty by providing microcredit and relevant training to landless and marginal borrowers, who have less than 1.5 acres of land, in order to enhance their standard of living. The study aims to assess the effects of BRAC's training programs on the recipients' total household expenditure. Primary data were collected from female borrowers who participated in the microcredit programs of BRAC and these data reflect the key role women play in agricultural work and the lack of research on their status. The study shows that the training provided to the borrowers failed to create any significant impact on their household expenditure because only a small percentage of borrowers received training and the duration of the training was limited (on average three days per person). Moreover, many of those who received training experienced only a modest income effect. The findings are important not just for the practical purpose of influencing policies for reducing poverty in Bangladesh but also for their contribution to the understanding of the effectiveness of training. The existing literature is concerned mainly with the effectiveness of training in the context of business and other organizations in developed countries. Research on the effectiveness of training in developing countries, particularly in alleviating poverty, is less evident. Moreover, the present research is also exceptional as it focuses only on female trainees.

Margin requirements and portfolio optimization: A geometric approach

Using geometric illustrations, we investigate what implications of portfolio optimization in equilibrium can be generated by the simple mean-variance framework, under margin borrowing restrictions. First, we investigate the case of uniform marginability on all risky assets. It is shown that changing from unlimited borrowing to margin borrowing shifts the market portfolio to a riskier combination, accompanied by a higher risk premium and a lower price of risk. With the linear risk-return preference, more stringent margin requirements lead to a riskier market portfolio, contrary to the conventional belief. Second, we investigate the effects of differential marginability on portfolio optimization by allowing only one of the risky assets to be pledged as collateral. It is shown that the resulting optimal portfolio is not always tilted towards holding more of the marginable asset, when the margin requirement is loosened.

It Is Private, Not Public Finances that Are Out of Whack

Abstract When the private sector as a whole is forced into debt minimization following the bursting of a debt-financed bubble, the money multiplier turns negative at the margin and government borrowing and spending become essential in maintaining both the GDP and money supply. With unborrowed private savings languishing in the financial system, the market also encourages government borrowing in the form of low bond yields which is a natural corrective mechanism of an economy suffering from balance sheet recession. In the eurozone, this corrective mechanism fails because of the ease of capital flight between government bond markets within the currency zone.

Repayment Performance of Institutional Agricultural Credit in Jaipur District of Rajasthan

The present study was conducted in Jaipur district of Rajasthan. A sample of 221 farmer borrowers was selected by using the random sampling technique. The results of repayment performance of credit indicated that only 81.27% of short-term credit, 84.34% of medium-term credit and 77.82% of long-term bank credit was repaid by due date and the remaining amount was overdue as on due date. The repayment performance of co-operative credit for rabi season was 92.62% and that for kharif season was 95.44%. It was higher as compared to banks. The results also indicated that out of 221 farmer borrowers, 124 (56.11%) were non-defaulters and 97 (43.89 per cent) were defaulters. The percentage defaulters among the farmer borrowers ranged from as high as 61.11% in the large farmer borrowers to as low as 36.36% in the marginal farmer borrowers. The regression results revealed that out of eleven explanatory variables only seven variables significantly affected the overdues of defaulters, however, their degrees and numbers varied from category to category. Out of these significant variables, four variables viz., amount borrowed, amount put to un-productive purposes, expenditures on family consumption and old debts were positively and the remaining three variables viz., gross farm income, non-farm income and cropping intensity negatively influenced the overdues.

Do Local Capital Market Conditions Affect Consumers' Borrowing Decisions?

This paper uses detailed data from an online peer-to-peer lending intermediary to test whether local access to finance affects consumers’ willingness to pay for loans. After controlling for local economic conditions and borrower credit quality, we find that borrowers who reside in areas with good access to bank finance request loans with lower interest rates. This effect is stronger for borrowers with poor credit and those seeking small loans, suggesting that local access to finance is more important for marginal borrowers. Overall, our findings shed light on how consumers substitute between alternative sources of finance.

Policy incentives and the extension of mortgage credit: Increasing market discipline for subprime lending

AbstractThe lax underwriting in non‐prime mortgage markets is widely perceived as one cause of the recent difficulties in the housing market. Policymakers are currently considering moves such as enforcing more careful underwriting to provide additional discipline to mortgage markets. This research explores the possibility of another approach to supplement or replace some of these efforts, namely the use of policy to create incentives for Fannie Mae and Freddie Mac (together, the GSEs) to help “check” behavior in non‐prime markets. The hypothesis is that the GSE Act affordable housing goals have increased GSE focus on targeted loan purchases, which in turn has led prime market lenders to compete more aggressively for borrowers on the margin between prime and subprime credit quality. As a consequence, these marginal borrowers will be more inclined to take prime mortgages rather than higher‐cost subprime loans. We test this hypothesis and find empirical support for it. We observe a negative relationship between the growth in GSE market share and the growth in subprime market share over time, and find that the impact of the GSEs on subprime lending tends to be stronger in high‐minority neighborhoods, where subprime lending has been concentrated and growing the fastest. Simulations show that a 10 percent increase in GSE market share (for example, from 20 to 22 percent) can cause 45,000 borrowers using prime instead of subprime loans a cost savings of about $1.7 billion. These results suggest that the GSEs, regardless of their postconservatorship form, should continue to devote attention to serving underserved populations and suggest that significant welfare benefits will accrue. © 2009 by the Association for Public Policy Analysis and Management.