Mortgage Bonds Research Articles

English

  This paper examines the degree of pass-through and the adjustment speed of the bank rate and partB rate  in response to changes in the repo and treasury bill rates in South Africa for the period 1998M4 to 2011M1. The repo rate is the policy rate while the treasury bill rate (TBR) represents money market rates.  We employ the ARDL and FMLS estimators to test for co-integration over the whole sample period 1998M4 to 2011M1. From the ARDL model, long-run repo rates pass-through to bank rates range from 0.83 to 1.21. Estimates higher than unity indicate the overshooting of bank rates. Long-run TBR pass-through to participation mortgage bond rates lie between 1.00 and 1.29. A striking result is that both repo rates and TBR show overshooting in bankrates and partB rates. This phenomenon is akin to overshooting in exchange rates due to price increases. Our repo results to bankrates are similar to Aziakpono et al. (2007) and De Angelis et al. (2005). To the author’s knowledge, there are no studies that have examined repo and TBR pass-through to participation mortgage bond rates in South Africa.     Key words: Interest rate pass-through, monetary policy, incomplete pass-through, ARDL, FMLS, bankrates, partB rates, overshooting, TBR, repo rates.

Moral Hazard and Dangers to Market Stability

Moral hazard describes a situation in which one person decides how much risk to take and keeps any gains, but passes off any losses to someone else. In other words, it’s “heads I win and tails you lose.” The U.S. has a financial system ripe with moral hazard, with an increasing amount of privatized profits and socialized losses. In an earlier white paper released in 2011, “Endogenous Risk and Dangers to Market Stability” (Pasztor, 2011), endogenous risk and the dangers it presents to market stability and investors was covered. Risk can be either exogenous, which is risk found outside the financial system and is reflected when doing fundamental analysis; or endogenous, which is risk found within the financial system itself. Endogenous risk is the most dangerous type of risk, and comes from aberrations and shocks that are generated within the financial system that then have a ripple effect throughout the financial markets and the economy. Moral hazards increase endogenous risk, and can cause extreme downside volatility, unleashing a chain of events that can be difficult to stop. The 2008 Financial Crisis is an example of this; and yet, very little has been done to bring down the amount of moral hazard risk since that crisis. In fact, both endogenous risk and moral hazard risk are increasing, largely due to the lack of holding individuals personally responsible for their actions. Huge sums of privatized profits continue to be made, with losses being paid (or would be paid if something goes wrong) by the taxpayers or by shareholders. “Too big to fail” remains a problem, and continues to encourage reckless behavior. One of the most prominent aspects of the 2008 meltdown is that both the so-called “winners” (those who bet against the subprime mortgage bonds) and “losers” (the traders and CEOs running the firms that were on the wrong side of the market and drove their firms into bankruptcy or were saved from bankruptcy by the U.S. government) got rich. Both sides recklessly leveraged their bets, turning our financial system into one big casino that ultimately collapsed. We have a system that actually encourages and rewards bad (and criminal) decisions. We also have a system that continues to work against regular investors; a current example being the growth of high frequency trading, a form of trading that has destabilized the market on more than one occasion. There has been and continues to be a dangerous complacency among both regulators and shareholders concerning the current state of affairs. Wall Street and the large U.S. banks have “captured” our regulatory and political system, to the detriment of most investors.

New Skills for Testers

In our world, software development and testing teams often work under ambitious deadlines, discovering what needs to be done at the same time as they're discovering how to do (1). On the other front, there is a shift from quality assurance to operational assurance (2). These ever changing and demanding expectations creates the requirement for the development of new skills in testers. In this paper, we will discuss on following points from a tester's perspective: 1. Changes happening in the world of software testing. 2. New skills required - Under this section we will see significance of tester having knowledge and wisdom of using language, and importance of the study of epistemology. I. Changes Happening In The World Of Software Testing There is much debate about how testing will be organized in the near future. The testing profession has evolved from the very first time developers started testing through to separate test phases and independence and then to collaborative testing (2). Volker Weimer, a member of the Board of COR&FJA, says, 'a number of banks are faced with the task of operating in a market that has undergone huge changes over the last few years - and not just caused by the financial crisis. It is this change that I should like to describe using an example: In times of volatile financial markets, new business requirements, such as refinancing through mortgage bonds, or altered customer management processes like online banking and CRM, are in demand. Banks that wish to introduce these facilities quickly and securely need IT solutions that can be integrated with flexibility'. A study shows that, predominantly, small institutions with a balance sheet total of up to 2.5 Billion Euros want to make sure that their core banking software meets not only today's requirements but also tomorrow's (4). Performance features that new, modern software for core banking business should have (4):

The Rise of Filtering Down

Between 1915 and 1929 across North America most commercial builders ceased to erect dwellings for low- and moderate-income households. As a result, these households increasingly relied on housing units that had filtered down. This development had momentous consequences for the housing market and eventually for housing policy as well as for the character of American cities. The reasons for this change were complex. They included a rapid and then permanent increase in building costs coupled with an irregular decline in owner-building, the means by which many families had once housed themselves. Especially after 1918 there was a shift in consumer preferences away from housing and toward other consumer goods, notably automobiles. This was partly counterbalanced by a new appreciation by the middle class of the virtues of home ownership and improvement, but this preference was channeled into the development of large, planned, and well-serviced subdivisions. This type of residential development required larger amounts of capital and fostered the growth of a new financial instrument, the mortgage bond. Bonds redirected the savings of small investors that had previously financed small-scale land speculation, house building, and landlordism. In 15 years the urban housing market had been transformed, with large consequences for the lives of Americans.

The Bankruptcy of Lehman Brothers: Causes of Failure & Recommendations Going Forward

The Bankruptcy of Lehman Brothers: Causes of Failure & Recommendations Going Forward

Covered Farm Mortgage Bonds in the United States During the Late Nineteenth Century

Covered mortgage bonds have been used successfully in Europe for two centuries, but failed in the United States when introduced as farm mortgage debentures in the 1880s. Using firm-level data and a sample of loans made by one Kansas mortgage company, I find that debenture programs grew out of established loan brokerage operations and were used to fund mortgages that were difficult to broker because of size, term, or risk characteristics. Debentures broadened access to the interregional mortgage market and facilitated an expansion of western farm mortgage debt before the innovation failed in the mortgage crisis of the 1890s.“[T]he availability of affordable mortgage financing is essential to turning the corner on the current housing crisis …. One option we have looked at extensively is covered bonds, which … have the potential to increase mortgage financing, improve underwriting standards, and strengthen U.S. financial institutions ….”Secretary of Treasury Henry PaulsonJuly 28, 2008

‘Banking Panics’ and Islamic Finance Principles: Lessons from the Current Crisis

Clearly, the recent ‘bank panics’ and global economic crisis occurred mainly due to the result of debt defaults in subprime mortgages. Firstly, default by home buyers for their loans repayment to the banks and secondly default by banks for their bond repayment in the mortgage bond market. If debt defaults can be avoided in the first place, bank panics and economic crisis will most likely not happen. This means that the origin of the problem is related to bank defaults in the Sub-Prime Model which arises due to poor credit evaluation by banks. Therefore the solution for the current crises should be focused on ways of avoiding debt defaults by borrowers.

Causes and Consequences of the Global Economic Crisis in the Present Period and its Impact on the Slovak Republic

The beginning of the present global economic crisis dates back to the year of 2007 when, in the same year, the crisis of American mortgage institutes emerged. The crisis was initiated by a large number of doubtful loans requested by clients, mostly by physical persons who were not able to pay them off. The market with securities (mortgage bonds) being covered by insolvent mortgages collapsed. This collapse led to an export of the American mortgage crisis to the global financial world because the mortgage bonds had been purchased by huge bank houses and institutional investors in all continents of the financial world. It is paradoxical that these bonds were given the favourable rating evaluations by renowned worldwide rating agencies. The mortgage crisis in the U.S.A. was gradually growing into the global financial crisis, at first in the U.S.A. and then throughout the world. As a consequence of the globalization and worldwide financial internationalization of the financial world the crisis spread to all spheres of the world economy and gave rise to the global economic crisis.

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.

Islamic Securitization After the Subprime Crisis

Islamic securitization in the form of sukuk has grown into a notable segment of global structured finance over the last three years. This article surveys the unique structural features of the sukuk market and assesses the potential of conflicts of interest that became apparent in the U.S. subprime mortgage crisis to contaminate the integrity of the securitization process if conducted in compliance with Shari’ah principles. This examination also considers recent regulatory changes to the definition of sukuk and current policy considerations of alternative forms of capital-market-based refinancing techniques, such as covered mortgage bonds, and the way they relate to Islamic securitization. The article concludes with a brief outlook on future challenges and developments in the sukuk market.

Lehren aus der Finanzkrise: Rolle des Staates und internationale Dimension / Lessons from the financial crisis: The role of government and the international dimension

Zusammenfassung Für den Ausbruch der Finanzmarktkrise waren nicht falsche Marktanreize, sondern falsche Erwartungen und Staatsversagen ausschlaggebend. Ein Vergleich der Risikoprämien am amerikanischen Hypotheken- und Anleihemarkt zeigt, dass die Krise nicht auf geringe Risikoscheu, sondern auf eine Unterschätzung der Risiken zurückzuführen ist. Die gleichen Faktoren, die das Versagen der Bankenaufsicht erklären, sprechen dagegen, die diskretionären Eingriffsrechte der Aufsichtsbehörden zu erweitern. Eine Internationalisierung der Bankenregulierung, wie sie jetzt in der Europäischen Union angestrebt wird, hätte die Krise nicht verhindert. Da jedes Land einen hinreichenden Anreiz hat, die Stabilität seines Finanzsystems zu gewährleisten, ist die Krise nicht durch einen Mangel an internationaler Koordination verursacht worden. Aus dem gleichen Grund bedarf es auch in Zukunft nicht einer internationalen Regulierung, sondern lediglich eines - möglicherweise verbesserten - Informationsaustauschs. Wie gezeigt wird, sind die Wirtschaftsprognosen internationaler Organisationen - insbesondere des IWF - sogar besonders unzuverlässig. Der Staat sollte solvente Banken nicht subventionieren und sich auch nicht an ihnen beteiligen. Banken, die Konkurs anmelden müssen, sollten dagegen von einer staatlichen Auffanggesellschaft vorübergehend weitergeführt und dann möglichst bald wieder verkauft werden. Die Eigenkapitalvorschriften müssen verschärft und flexibilisiert werden. Es ist auch Aufgabe des Staates, den Finanzinstituten Offenlegungspflichten aufzuerlegen.

Islamic securitisation: An ethical remedy to incentive problems?

Islamic securitisation in the form of sukuk has grown into a notable segment of global structured finance over the recent past. This paper surveys the unique structural features of the sukuk market and assesses the resilience of shari'ah compliance to the adverse effects of conflicts of interest that became apparent in the US subprime mortgage crisis and the subsequent fallout in global financial markets. This examination also considers recent regulatory changes to the definition of sukuk and current policy considerations of alternative forms of capital-market based refinancing techniques, such as covered mortgage bonds, and the way they relate to Islamic securitisation. The paper concludes with a brief outlook on future challenges and developments in the sukuk market.

Creating insurance markets for natural disaster risk in lower income countries: the potential role for securitization

This article considers the potential for securitizing index‐based insurance products that transfer weather and natural disaster risks from lower income countries. It begins with a brief overview explaining why markets for natural disaster risks are important, yet often missing, in lower income countries and a review of some recent activities using index‐based weather insurance. Next, we describe how natural disaster risks are handled in higher income countries. These examples, along with the example of an innovative index‐based livestock insurance pilot project in Mongolia, illustrate how layers, or tranches, of natural disaster risk can be financed during the product development phase by creating structures similar to the Special Purpose Vehicles used in catastrophe bond, mortgage bond, and the emerging microfinance bond markets. We refer to these investment alternatives as micro‐CAT bonds since the principle amounts would be small relative to the existing CAT bond market.

Should the Federal Government Freeze Foreclosures?

The government has been asked to limit mortgage lending activity, to force the mortgage industry to modify existing loans, and to take an active roll in direct mortgage lending and loan servicing. Investors may lose confidence in the future of the subprime mortgage market and refuse to invest more money into mortgage bond investments. What the Federal Government can do is facilitate an industry led moratorium on foreclosures by creating an environment favorable to mortgage companies who choose to hold all foreclosures until economic conditions improve.

Event of Default Provisions and the Valuation of ABS CDO Tranches

In early October 2007, Moody9s downgraded 2,506 first lien subprime bonds issued in 2006. Most of these were rated from A1 to Baa3. An additional 323 bonds rated A1 to Baa3 were kept on watch for further downgrade, and 529 Aaa and Aa subprime bonds were put on watch for downgrade. As a result of these massive downgrades and future rating agency downgrades, investors have become concerned that Event of Default (EoD) provisions in ABS CDOs will be tripped, allowing controlling investors to accelerate many CDOs that own subprime bonds. This would result in diversion of cash flows from lower rated CDO tranches until principal and interest were paid in full on the highest rated tranches. In this article, the authors briefly review EoD provisions, explain how EoD provisions have reshaped the landscape for many distressed collateralized debt obligations backed by subprime mortgage bonds, and show that while many CDOs share basic EoD features, the substantive effect on the cash flows to CDO tranches varies widely. Two decision trees, one to show the diversity of ABS CDO cash flow acceleration features and another to rank different structures by the length of interest flow to subordinate tranches, are presented to show how the most important factors affect cash flows. <b>TOPICS:</b>Asset-backed securities, CLOs, CDOs, and other structured credit, legal and regulatory issues for structured finance

Reforming Housing Finance - Perspectives from Denmark

We investigate the effect of adding a distinct feature of the Danish mortgage market to the US market, namely a buyback option, which enables mortgagors to buy back their share of the mortgage bond at market price. Extending a standard referenced pricing-model, we find that the introduction of the buyback option reduces the credit spread required by the financial intermediary with 23%, potentially reducing the contingent liability of the US government. Furthermore, the buyback option protects households against the risk of being locked in after an increase in interest rates and could benefit in particular low-to-middle income households.

Lawyers' Contribution to Business Development in Early Twentieth-Century Mexico

The Mexican Revolution (1910) brought important changes to the social, political and economic spheres of Mexico. New legislation was passed to protect workers and redistribute land. The state acquired rights to petroleum, water, and subsoil minerals. For entrepreneurs this was an abrupt change from the previous regime. They had to adapt to the new policies and administrative state structure. Business lawyers aided companies in a country where the government had circumscribed the private sector's participation in the economy. Lawyers offered their clients important services, such as lobbying and aid in corporate restructuring. This article explores how in the midst of these new revolutionary regimes an important investment group used the services of business lawyer Manuel Gómez Morin to create Mexico's first holding company and to issue the first mortgage bonds in the country.

Lawyers' Contribution to Business Development in Early Twentieth-Century Mexico

The Mexican Revolution (1910) brought important changes to the social, political and economic spheres of Mexico. New legislation was passed to protect workers and redistribute land. The state acquired rights to petroleum, water, and subsoil minerals. For entrepreneurs this was an abrupt change from the previous regime. They had to adapt to the new policies and administrative state structure. Business lawyers aided companies in a country where the government had circumscribed the private sector's participation in the economy. Lawyers offered their clients important services, such as lobbying and aid in corporate restructuring. This article explores how in the midst of these new revolutionary regimes an important investment group used the services of business lawyer Manuel Gómez Morin to create Mexico's first holding company and to issue the first mortgage bonds in the country.

An Empirical Investigation of Exchange Rate Pass-Through in South Africa

This paper analyzes the degree to which fluctuations in the nominal exchange rate passthrough to consumer prices in South Africa. While the average pass-through is found to be low, evidence from a structural vector autoregression suggests it is much higher for nominal (versus real) shocks. Historical decompositions suggest that the nominal exchange rate depreciation up to November 2001 is attributable primarily to negative real shocks, which explains why CPIX (consumer price index excluding interest on mortgage bonds) inflation did not increase significantly until December 2001, when positive nominal shocks began to contribute to the depreciation.

Mortgage Prepayment by Defeasance

To protect against losses when borrowers prepay to take advantage of declining interest rates, banks and insurance companies have come to rely on clauses. These provisions require the borrower to make a lump sum payment to cover the lender?s potential loss from reinvesting prepaid sums. For reasons described later, yield maintenance provisions have proved woefully insufficient to compensate the holders of securitized commercial mortgage loans when borrowers prepay. Increasingly, mortgage loans originated for sale through commercial mortgage backed securities (CMBS) only allow prepayment through defeasance. Under defeasance provisions, prepaying borrowers must provide Treasury obligations exactly matching the cash flow of all scheduled mortgage payments. This article compares the practical consequences of yield maintenance to defeasance provisions for commercial borrowers and mortgage bond investors.