Supply Of Mortgage Credit Research Articles

Credit Supply and Housing Speculation

Speculation is a critical channel through which credit supply expansion affects the housing cycle. The surge in private label mortgage securitization in 2003 fueled a large expansion in mortgage credit supply by lenders financed with non-core deposits. Areas more exposed to these lenders experienced a large relative rise in transaction volume driven by a small group of speculators, and these areas simultaneously witnessed an amplified housing boom and bust. Consistent with the importance of belief heterogeneity, house price growth expectations of marginal buyers rose during the boom, while housing market pessimism among the general population increased.

Does CFPB Oversight Crimp Credit?

We study how regulatory oversight by the Consumer Financial Protection Bureau (CFPB) affects mortgage credit supply and other aspects of bank behavior. We use a difference-in-differences approach exploiting changes in regulatory intensity and a size cutoff below which banks are exempt from CFPB scrutiny. CFPB oversight leads to a reduction in lending in the Federal Housing Administration (FHA) market, which primarily serves riskier borrowers. However, it is also associated with a lower transition probability from moderate to serious delinquency, suggesting that tighter regulatory oversight may reduce foreclosures. Our results underscore the trade-off between protecting borrowers and maintaining access to credit.

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.

Prudential Policies and Their Impact on Credit in the United States

We analyze how two types of recently used prudential policies affected the supply of credit in the United States. First, we test whether the U.S. bank stress tests had any impact on the supply of mortgage credit. We find that the first Comprehensive Capital Analysis and Review (CCAR) stress test in 2011 had a negative effect on the share of jumbo mortgage originations and approval rates at stress-tested banks—banks with worse capital positions were impacted more negatively. Second, we analyze the impact of the 2013 Supervisory Guidance on Leveraged Lending and subsequent 2014 FAQ notice, which clarified expectations on the Guidance. We find that the share of speculative-grade term-loan originations decreased notably at regulated banks after the FAQ notice.

Mortgage Market Credit Conditions and U.S. Presidential Elections

Voters punish incumbent Presidential candidates for contractions in the local (county-level) supply of mortgage credit during market-wide contractions of credit, but they do not reward them for expansions in mortgage credit supply in boom times. Our primary focus is the Presidential election of 2008, which followed an unprecedented swing from very generous mortgage underwriting standards to a severe contraction of mortgage credit. Voters responded to the credit crunch by shifting their support away from the Republican Presidential candidate in 2008. That shift was particularly pronounced in states that typically vote Republican, and in swing states. The magnitude of the effect is large. If the supply of mortgage credit had not contracted from 2004 to 2008, McCain would have received half the votes needed in nine crucial swing states to reverse the outcome of the election. The effect on voting in these swing states from local contractions in mortgage credit supply was five times as important as the increase in the unemployment rate; if unemployment had not increased from 2004 to 2008, that improvement in local labor markets would only have given McCain only 9% of the votes needed to win the nine crucial swing states. We extend our analysis to the Presidential elections from 1996 to 2012 and find that voters’ reactions are similar for Democratic and Republican incumbent parties, but different during booms and busts of mortgage credit. These asymmetric results indicate that voters react strongly and negatively to credit supply contraction; however, organized political bargaining (the “smoke-filled room channel”) rather than voting was the primary vehicle for rewarding politicians for supporting government subsidies for mortgage risk during booms.

Risky Mortgages, Bank Leverage and Credit Policy

Two key channels that allowed the 2007-2009 mortgage crisis to severely impact the real economy were: a housing net worth channel, as defined by Mian and Sufi (2014), which affected the wealth of leveraged households; and a bank net worth channel, which reduced the ability of financial intermediaries to provide credit. To capture these features of the Great Recession, I develop a DSGE model with balance-sheet constrained banks financing both risky mortgages and productive capital. Mortgages are provided to agents facing idiosyncratic housing depreciation risk, implying an endogenous default decision and a link between their borrowing capacity and house prices. The interaction among the housing net worth channel, the bank net worth channel and endogenous foreclosures generates novel amplification mechanisms. I analyze the quantitative implications of these new channels by considering two different shocks linked to the supply of mortgage credit: an increase in the va riance of housing risk and a deterioration in the collateral value of mortgages for bank funding. Both shocks are able to produce co-movements in house prices, business investment, consumption and output. Finally, I study two types of policy interventions that are able to reduce the severity of a mortgage crisis: debt relief for borrowing households and central bank credit intermediation.

Demand and Supply of Mortgage Credit

This paper estimates demand and supply of mortgage credit by using a hierarchical trend model. The empirical analysis is based on loan-level data covering the years 2005-2014 in the Netherlands. We find that high-income households take out higher loan amounts and have higher collateral values. Interest rates are negatively related to both loan amounts and collateral values. The common trend in the loan equation, a proxy for the changes in demand and supply of mortgage credit over time, suggests a large decline in mortgage demand and supply after 2007. The common trend in the collateral value equation is highly correlated with the common trend in the loan equation, suggesting a high pass-through rate of changes in credit conditions from loan to value. We also find that young household cohorts can afford to buy better quality houses in 2014 than in 2005, even if they could borrow less. On the contrary, older household cohorts take out higher loans in 2014 than in 2005, but their collateral values do not change. We argue that younger households took up less mortgage debt as they became more credit constraint over time. Older households on the other hand suffered from negative home equity, forcing them to take up higher mortgage loans.

Effects of prepayment regulations on termination of subprime mortgages

Abstract Because of their higher interest rates, subprime mortgages are subject to substantial prepayment risk as borrowers who succeed in improving their creditworthiness systematically prepay leaving those with higher credit risk in the mortgage pool. Lenders anticipated this problem and attached substantial prepayment penalties to subprime mortgages. Some state governments responded with regulations that banned prepayment penalties. This created a natural experiment in which the effects of prepayment penalties on the supply and performance of endorsed mortgages can be evaluated. Ho and Pennington Cross (2008) have demonstrated that these regulations reduced the supply of mortgage credit. In this paper, the effect of prepayment penalty restrictions on the performance of endorsed subprime mortgages is tested. Theory predicts that the restrictions should raise prepayment and lower default. The empirical results strongly confirm the first prediction while the effects on default have the correct sign but lack significance.

Household Debt and Defaults from 2000 to 2010: Facts from Credit Bureau Data

During the first decade of the 21st century, the United States witnessed a dramatic rise in household debt followed by a severe default crisis. In this study, we review the existing literature and provide new evidence supporting the credit supply view of the episode, which holds that an increase in credit supply unrelated to fundamental improvements in income or productivity was the shock that initiated the household debt boom and bust. The credit supply view is supported by four facts: First, from 2002 to 2005, there was an expansion of mortgage credit supply that was independent of improved economic circumstances. This can most easily be seen in the increased number of mortgages for home purchase originated to marginal households, or households that previously were routinely denied mortgage credit. Second, the expansion in mortgage credit supply increased house prices. Third, existing homeowners responded to rising house prices by borrowing aggressively out of home equity; such borrowing was prevalent in all but the top 20% of the credit score distribution and was the primary driver of the rise in aggregate household debt. Fourth, the default crisis was driven mainly by lower credit score individuals. The view that credit played only a passive role in explaining the rise in household debt and the subsequent default crisis is inconsistent with the evidence.

Refinancing, Default and the Community Reinvestment Act

The Community Reinvestment Act (CRA) provides incentives for banks to supply credit to low and moderate income neighborhoods in the communities they serve. This paper estimates the effect of the act on the supply of mortgage credit. I exploit variation in the number of banks whose lending performance is assessed in a given neighborhood caused by the redefinition of Metropolitan Statistical Areas in late 2003. I find evidence of a substantial increase in mortgage refinancing due to the CRA. I show that the CRA induced loans had a reduced likelihood of default.

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.

Recourse to Non-Housing Assets and Mortgage Credit Supply

Because state anti-deficiency statutes rarely change over time, the opportunity to test the importance of recourse for the mortgage market is limited. I exploit the bankruptcy reform in 2005 (which effectively strengthens recourse) as a quasi-natural experiment to show that aggregate quantity of mortgage lending is increased after the reform is implemented. Lenders appear to adjust their underwriting through approval decision rather than interest rate. Overall, my study finds that strengthening recourse — while potentially useful as a tool to discourage strategic default and foreclosure — can also expand credit supply through increased collateral value.

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in the judicial requirements across U.S. states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel nonbinary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidy by the GSEs to borrower-friendly states that has been overlooked thus far.

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in the judicial requirements across U.S. states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel nonbinary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidy by the GSEs to borrower-friendly states that has been overlooked thus far.

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

Using Bankruptcy to Reduce Foreclosures: Does Strip-Down of Mortgages Affect the Supply of Mortgage Credit?

Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws

Laws governing the foreclosure process can have direct consequences on the costs of foreclosure and could therefore affect lending decisions. We exploit the heterogeneity in judicial requirements across U.S. state borders to examine their impact on banks' lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to GSE guarantees which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans that are ineligible for GSE guarantees. These laws do not affect, however, the relative demand of jumbo loans. Our findings, which also hold using novel non-binary measures of judicial requirements, illustrate the consequences of foreclosure laws on the supply of mortgage credit. They also shed light on a significant indirect cross-subsidization by the GSEs to borrower-friendly states that has been overlooked thus far.

House Prices and Credit Constraints: Making Sense of the US Experience

Most US house price models break down in the mid-2000s, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions – the cyclically adjusted loan-to-value ratio for first-time buyers – into house price-to-rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

House Prices and Credit Constraints: Making Sense of the U.S. Experience

Most US house price models break down in the mid-2000's, due to the omission of exogenous changes in mortgage credit supply (associated with the sub-prime mortgage boom) from house price-to-rent ratio and inverted housing demand models. Previous models lack data on credit constraints facing first-time home-buyers. Incorporating a measure of credit conditions - the cyclically adjusted loan-to-value ratio for first time buyers - into house price to rent ratio models yields stable long-run relationships, more precisely estimated effects, reasonable speeds of adjustment and improved model fits.

Do the GSEs expand the supply of mortgage credit? New evidence of crowd out in the secondary mortgage market

The dramatic government takeover of Fannie Mae and Freddie Mac in September, 2008 was motivated in part by a desire to ensure a continued flow of credit to the mortgage market. This study examines a closely related issue: the extent to which GSE activity crowds out mortgage purchases by private secondary market intermediaries. Evidence of substantial crowd out suggests that government support for the GSEs may be less warranted, whereas the absence of crowd out implies that GSE loan purchases enhance liquidity. Using 1994–2008 HMDA data for conventional, conforming sized loans, three distinct periods with regard to GSE crowd out are apparent. From 1994 to 2003, the share of loans sold to the secondary market increased from 60 to over 90%, private sector and GSE market shares of loan purchases were roughly similar for most market segments, and IV estimates indicate relatively little GSE crowd out of private secondary market purchases. From 2004 to 2006, private loan purchases boomed and dominated those of the GSEs, while IV estimates indicate crowd out jumped to 50% at the peak of the boom. This is especially true in the market for home purchase as opposed to refinance loans. With the crash in housing and mortgage markets in 2007, private sector intermediaries pulled back, the GSEs regained market share, and evidence of GSE crowd out disappeared in both the home purchase loan and refinance markets. These patterns suggest that the degree of GSE crowd out varies with market conditions and that the federal takeover of Fannie Mae and Freddie Mac likely served to enhance liquidity to the mortgage market during the 2007–2009 financial crisis.