Securitization Of Mortgage Loans Research Articles

Prepayment and Default Risks of Mortgage-Backed Security Collateral Pools

Mortgage-backed securities (MBS) are structured financial products that are produced via securitization of mortgage loans. Due to the nature of securitization, all risks of mortgage loans are transferred from originators to MBS investors. Prepayment and default risks of mortgages lead to uncertainty in MBS cash flows and create a complex problem for valuation of these instruments. Therefore, estimating these mortgage termination risks has become the focus of valuation of MBS collateral pools. This study explores two questions by using a publicly open dataset provided by Fannie Mae. First, two machine learning algorithms (Random Forest and Multinomial Logit Regression) are used for classification to predict whether a mortgage loan is likely to be prepaid, defaulted or current. Afterwards, Competing Risks Cox Regression Analysis is performed to see determinants of when mortgage termination risks are likely to happen. It is found that not all mortgage borrowers behave optimally in their prepayment and default decisions. Therefore, in addition to refinancing incentive and negative equity which depend on variations in prevailing mortgage interest rates and housing prices, heterogeneity in mortgage borrowers’ behaviors and loan characteristics, and also local economic factors are significantly important in estimating mortgage termination risks. It is worth noting that prominence role of mortgage payment delinquencies in particularly predicting defaults emphasizes the essential need of monitoring payments by servicers to keep safety of MBS investors and financial markets.

Globalization of mortgage-backed securities market in Russia: Legal impact on transaction economy

Research background: The exponential growth of mortgage lending has taken on increasing importance in development of securitization activities market for mortgage assets throughout the world. The difficulty of comparing mortgage-backed securities of different countries explained by varying national legal features is the reason why there is no international market for such securities. Since 2014, the mortgage securities market has entered the stage of nationalization; as a result, it slowed down and lost the necessary infrastructure, including its legal components. Since securitization of mortgage loans first originated and became common in developed economies, it is of interest to compare Russian and international experience of legal regulation of each transaction stage. Purpose of the article: The purpose of this paper is to analyze legal regulation features of mortgage securitization in different countries and their impact on economic characteristics of securities in order to develop a globalization strategy for this market. Methods: The study is based on open data from Russian, European, American, England Central Banks and uses methods of structural, statistical, dynamic analyses and abstraction which made it possible to form holistic and substantiated conclusions. Findings & Value added: As a result of research activities, key features of legal regulation of mortgage securitization transaction have been identified. Based on these findings, a strategy for globalization of mortgage securities market was proposed. It contributes to international cooperation development in the field of long-term projects financing, including support measures of mortgage lenders.

State Support of Building Complex through Mortgage Rate Reduction: Prospects and Risks

In February 2020 the Russian government decided to develop public incentives for the mortgage rate reduction at least to 8%. What is the supposed economic effect of this decision? Can implementation of the new state program trigger another large-scale crisis on the market? The author makes an attempt to answer these extremely relevant questions by tapping into the experience of creation, development and a relatively recent failure of similar programs in the United States. The research done has revealed that the Russian government’s urge to harness the priming of economy through the support of mortgage lending, which was used in developed markets long ago, gradually gives rise to the same alarming symptoms that proved to be the forerunners of the world financial crisis in 2008-2009. Already available in Russia is an increasingly bulky and non-transparent system of mortgage loan securitization, a rapidly growing number of approved loans, mortgage rate reduction vigorously stimulated by the Russian government that brings about the gradual easing of claims on the quality of mortgage loans issued by retail banks in the backdrop of stiffening competition between banks and, as a consequence, the bank margin reduction. Thus all factors of the possible future collapse are on hand. The author comes to the conclusion that in order to prevent the situation getting out of control, the urgent development and adoption at the state level of scientifically grounded methodology is needed, whereby the development of real estate and contiguous sectors (banking infrastructure, in the first place) is to be put in sync with mechanisms of state support for the building complex.

Diversification and securitization of credit portfolios of Ukrainian banks

The article is devoted to the analysis of diversification of loan portfolios and securitization of financial assets by Ukrainian banks. The advantages and disadvantages of diversification and securitization use are discussed. The volumes of such operations and the separation of the actual lending market by types of economic activity, territory and in the sectional frame of individual persons and economic agents are determined. The rules of behavior and functions of participants of securitization, as well as its main varieties, are revealed. The forecasting of the ability of Ukrainian banks to securitize assets is carried out, but most Ukrainian banks can not securitize their assets, which is explained not only by small volumes of lending, but also by other reasons, including: underdeveloped legal base (legal status of a specialized legal company is not defined and the specifics of taxation of such operations have not been clarified); weak infrastructure of financial and stock markets, lack of financial instruments; inflexible tax system; low credit rating of Ukraine. In addition, the level of development of the financial and stock markets is not sufficient. According to the results of the study, it was concluded that there is an uneven distribution of loans both by type of economic activity and by geography: about 33 % of loans were provided to clients of wholesale and retail trade; the largest share of loans was concentrated in the Kyiv region – 60 %. The analysis reveals the territorial unevenness of banking lending services. The research shows the potential ability of Ukrainian TOP-Banks to securitize assets. The average amount of financial assets that were securitized was US $ 55 million. The analysis showed the inappropriateness of securitization for auto-lending and the high suitability for securitization of mortgage loans to individuals. Asset securitization for a typical Ukrainian bank encompasses a large number of clients who have been granted loans, which necessitates a clear definition of the rules of conduct and functions of the securitization participants.

The optimal model for securitization of mortgage loans granted to entities operating in the banking sector

The optimal model for securitization of mortgage loans granted to entities operating in the banking sector

Financial System and Housing Price

ABSTRACTThe 2007/2008 US financial crisis is related to the securitization of mortgage loans and the housing-price boom and bust. In this article, we test the hypothesis that housing-price change is related to the development of the financial system. Using panel data for 23 countries from 1988 to 2012, we have found that the housing-price growth rate increases as the financial system moves a bank orientation to a market orientation. The policy implication is that the government should beware sudden increases in the capital market relative to the banking sector. Especially, more sophisticated financial supervision with respect to housing-price movement is required when a bank-based financial system progresses quickly to a market-oriented financial system.

Moral hazard in securitization

Anecdote and scholarly research both suggest that moral hazard in mortgage loan securitization (origination-and-distribution) process led to lenders’ loose screening, and thus was one of the major causes of the 2008 financial crisis. This paper points out several potential limitations of this conventional view by examining theory and empirical evidence regarding moral hazard in securitization. It suggests that the lax underwriting standard during the crisis was mostly due to optimistic plague and excess liquidity, in addition to information asymmetry and moral hazard. These analyses contribute to a better understanding of the mechanism underlying the financial crisis, which is especially important for emerging economies to strike a balance between innovation and regulation in their financial markets.

An Inquiry into the Legal Standing of Rogue REMICS in Foreclosures

The business of privatized mortgage loan securitization (Real Estate Mortgage Investment Conduits or “REMICS”) is so arcane and specialized that few people outside of that realm of investment knowledge understand, or even care to understand how loan securitization functions. However, if the difference between a legitimate REMIC and a Rogue REMIC is adequately explained, one can begin to understand why Rogue REMICs must be exposed as unlawful enterprises whose affiliates are not only able to disregard existing federal securities and tax laws, but are also able to circumvent state and local foreclosure laws at will. These ongoing violations result from the intentional and commonplace shortcutting of the proper mortgage loan securitization processes during the several years preceding the 2008 financial crisis. This Inquiry will not focus primarily on how and why Rogue REMICS violate federal tax and securities laws; although those aspects are part of the discussion by necessity. I will argue that all Rogues lack the perquisite legal standing to prosecute both judicial and non-judicial foreclosures. I will present compelling evidence that, in the aftermath of the 2008 financial crisis, foreclosures by Rogues may have exceeded 10% of all foreclosures. I will further argue that county officials may be violating state laws by recording the documents that impart false legal standing to the Rogues. I will conclude with a suggestion to homeowners on how to proceed if a mortgage assignment to a Rogue turns up in the local County public records.

An Inquiry into the Legal Standing of Rogue Remics in Foreclosures

The business of privatized mortgage loan securitization (Real Estate Mortgage Investment Conduits or “REMICS”) is so arcane and specialized that few people outside of that realm of investment knowledge understand, or even care to understand how loan securitization functions. However, if the difference between a legitimate REMIC and a Rogue REMIC is adequately explained, one can begin to understand why Rogue REMICs must be exposed as unlawful enterprises whose affiliates are not only able to disregard existing federal securities and tax laws, but are also able to circumvent state and local foreclosure laws at will. These ongoing violations result from the intentional and commonplace shortcutting of the proper mortgage loan securitization processes during the several years preceding the 2008 financial crisis. This Inquiry will not focus primarily on how and why Rogue REMICS violate federal tax and securities laws; although those aspects are part of the discussion by necessity. I will argue that all Rogues lack the perquisite legal standing to prosecute both judicial and non-judicial foreclosures. I will present compelling evidence that, in the aftermath of the 2008 financial crisis, foreclosures by Rogues may have exceeded 10% of all foreclosures. I will further argue that county officials may be violating state laws by recording the documents that impart false legal standing to the Rogues. I will conclude with a suggestion to homeowners on how to proceed if a mortgage assignment to a Rogue turns up in the local County public records.

Mortgage loan securitization and personal consumption smoothening

In this paper we examine the extent to which personal consumptions are sheltered from state-specific economic shocks because of banks’ mortgage loan securitizations. We posit that securitization contributes to personal consumption smoothening due to securitizations’ positive effect on banks’ credit supply, which reduces consumers’ consumption constraints during economic shocks. Using data for U. S. banks’ mortgage loan securitizations from 1989 to 2008, we show that personal consumption smoothening is positively related to securitization. The finding of a significant relationship between loan securitizations and consumption smoothening contributes to the continuing debate on the role of financial innovation in real economy.

Insights from the failure of the Countrywide Financial Corporation

Purpose – This paper aims to evaluate the business activities, financial reports, and management compensation practices of Countrywide Financial Corporation (Countrywide) in the period preceding the company's financial distress and leading to its eventual takeover by Bank of America in 2008. This analysis provides a number of insights into the risks that Countrywide was exposed to which may guide future research and financial management. Design/methodology/approach – Case study evaluating the failure of Countrywide Financial Corporation. Findings – First, Countrywide was highly reliant upon the securitization of mortgage loans to finance its activities and this was apparent in the financial reports. Second, these securitization transactions exposed Countrywide to significant financial risks, including the risk inherent in the uncertain values of residual interests and warrantees. Problematically, these risks were not transparently reflected in the financial reports, as confirmed by the lag in the timing of stock price responses. This untimely market response suggests the equity market was not aware of Countrywide's risk exposures until shortly before the company's solvency crisis. Third, the compensation practices of Countrywide encouraged and rewarded management for exposing the firm to significant risks. Practical implications – This paper provides insights into financial management that are relevant for researchers and professionals. Originality/value – This paper provides insights for researchers and practitioners relating to the impact of asset securitization on business risk and how these business activities and risks are disclosed in the financial reports.

Insights from the Failure of the Countrywide Financial Corporation

This paper evaluates the business activities, financial reports, and management compensation practices of Countrywide Financial Corporation (Countrywide) in the period preceding the company’s financial distress and leading to its eventual takeover by Bank of America in 2008. This analysis provides a number of insights into the risks that Countrywide was exposed to which may guide future research and financial management. First, Countrywide was heavily reliant upon the securitization of mortgage loans to finance its activities, which was apparent from the financial report disclosures. Second, these securitization transactions exposed Countrywide to significant financial risk because of retained interests and the poor quality of many underlying mortgages. However, the risk was not reflected transparently in the financial reports, as evidenced by the timing of stock price responses. Untimely market responses suggest the equity market was not aware of Countrywide’s risk exposure until shortly before the company’s solvency crisis. Third, the design of CEO compensation at Countrywide encouraged and rewarded management for exposing the firm to significant risk. The analysis and supporting evidence in this paper contributes insights into financial management that is relevant for researchers and professionals.

Mortgage Loan Securitization and Relative Loan Performance

We compare the ex ante observable risk characteristics, the default performance, and the pricing of securitized mortgage loans to mortgage loans retained by the original lender. In our sample of loans originated between 2000 and 2007, we find that privately securitized fixed and adjustable-rate mortgages were riskier ex ante than lender-retained loans or loans securitized through the government sponsored agencies. We do not find any evidence of differential loan performance for privately securitized fixed-rate mortgages. We find evidence that privately securitized adjustable-rate mortgages performed worse than retained mortgages, although other observable factors appear to be more economically important determinants of mortgage default. We do not find any evidence of a compensating premium in the loan rates for privately securitized adjustable-rate mortgages.

Mortgage Loan Securitization and Relative Loan Performance

We compare the ex ante observable risk characteristics and the default rates of securitized mortgage loans and mortgage loans retained by the original lender. We find that privately securitized loans tend to be riskier and to default at a faster rate than loans securitized with the GSEs and lender-retained loans. However, the differences in default rates across investor types are of secondary importance for explaining mortgage defaults compared to more conventional predictors, such as original loan-to-value ratios and the path for house prices. Privately securitized home mortgages have conditionally higher expected returns than retained loans, suggesting the presence of risk factors that are unobservable but nonetheless at least partially acknowledged by the market.

Securitized Loan Due Diligence: Expert Status forIndependent Third-Party Review Firms

This article explains the need for an independent mortgage loan review process in connection with the securitization of mortgage loans, the U.S. SEC’s new stipulation that any diligence firm named to a transaction will be held to expert status, and five key areas the diligence industry must address to shoulder the extra burden of being held legally liable for statements: a certification process for expert firms, a certification process for analysts, standards for training, standards for loan reviews, and a governing body of peers. It is premature to hold a firm to expert status before the industry is ready to step up and provide the other mechanisms that will enable firms to perform at that level. <b>TOPICS:</b>MBS and residential mortgage loans, legal and regulatory issues for structured finance

A note on the subprime mortgage crisis: dynamic modelling of bank leverage profit under loan securitization

In this brief research article, we consider the financial modelling of the process of mortgage loan securitization that has been a root cause of the ongoing Subprime Mortgage Crisis (SMC). In particular, we suggest a Lévy process-driven model of bank leverage profit that arises from the securitization of a pool of subprime mortgage loans. To achieve this, we develop stochastic models for mortgage loans, mortgage loan losses, credit ratings and mortgage loan guarantees in a subprime context. These models incorporate some of the most important issues related to the SMC and its causes. Finally, we provide a brief analysis of the models developed earlier in our contribution and its relationship with the SMC.

The Rhetoric ofMouvementand Passionate Expression in Seventeenth-Century French Harpsichord Music

Financialization can be characterized as capital switching from the primary, secondary or tertiary circuit to the quaternary circuit of capital. Housing is a central aspect of financialization. The financialization of mortgage markets demands that not just homes but also homeowners become viewed as financially exploitable. It is exemplified by the securitization of mortgage loans, but also by the use of credit scoring and risk-based pricing. In the past century, mortgage markets were transformed from being a ‘facilitating market’ for homeowners in need of credit to one increasingly facilitating global investment. Since mortgage markets are both local consumer markets and global investment markets, the dynamics of financialization and globalization directly relate homeowners to global investors thereby increasing the volatility in mortgage markets, as the current crisis shows all too well.

Smoke and Mirrors: Predatory Lending and the Subprime Mortgage Loan Securitization Pyramid Scheme

Smoke and Mirrors: Predatory Lending and the Subprime Mortgage Loan Securitization Pyramid Scheme

Optimal mortgage loan securitization and the subprime crisis

We analyze the process of mortgage loan securitization that has been a root cause of the current subprime mortgage crisis (SMC). In particular, we solve an optimal securitization problem for banks that has the cash outflow rate for financing a portfolio of mortgage-backed securities (MBSs) and the bank’s investment in MBSs as controls. In our case, the associated Hamilton–Jacobi–Bellman equation (HJBE) has a smooth solution when the optimal controls are computed via a power utility function. Finally, we analyze this optimization problem and its connections with the SMC.

The Sociology and Geography of Mortgage Markets: Reflections on the Financial Crisis

The article presents a symposium discussion assessing the role the sociological and geographical aspects of the mortgage market played in the 2008 financial crisis. Combinations of interrelated causes of the global financial crisis include deregulation and re-regulation, financialization and globalization, and bubbles and wrong incentives. The various ways the mortgage market is shaped and reshaped by both mortgage lenders and state institutions is examined. It is stressed that mortgage loan securitization is largely an invention of government and government erected institutions such as Fannie Mae and Freddie Mac.