Collapse Of Mortgage Market Research Articles

The Subprime Crisis: Cause and Effect

This research explains and analyzes how the Subprime Crisis happened in 2008 and how the crisis impacted the market and policy in America. The causes are unfolded from three perspectives. First reason is that government adopt a low interest rating, aiming at increasing the house affordability. Second, excessively innovative financial products, such as MBS, and credit rating agencies lead to even more unlimited loans with poor quality. Third, the complex commercial chain behind mortgage products enlarged the range of the crisis’s influence, which is triggered by government increasing the interest rate. The meltdown of subprime commercial chain brings a series damages: house market bubble burst, banks and businesses broken, rapidly decreasing employment rate, etc. To control the continuing damages from the collapse of mortgage market, the US government begins to intervene the market by promulgating laws, including Dodd-Frank legislation and Basel III to regulate and restrict businesses’ and banks’ behaviors.

Housing Market Dynamics: Disequilibrium, Mortgage Default, and Reverse Mortgages

The mortgage market collapse which followed the burst of the housing bubble in 2007 led to unprecedented levels of mortgage default, mortgage foreclosure, and housing vacancies. The dramatic increase in mortgage terminations prompted extensive discussions among academics, industry practitioners, regulators, and policymakers. These discussions included such issues as the underlying causes of the mortgage market collapse and the impact of declining house prices on mortgage default and foreclosure. This special issue results from the 2013 FSU-UF Critical Issues Symposium entitled “Housing Market Issues: Initiatives, Policies and the Economy” where the impact of the recent market collapse was examined on topics such as the negative spillover effect of foreclosure, the determinants of mortgage default and prepayment, disequilibrium models of the housing market, and the growth of the reverse mortgage market. This introductory paper serves to set the stage by relating the papers in this special issue to the previous literature. It provides both a clear picture of the state of knowledge in these critical areas and the significant contributions of these recent studies.

Ignorance is Not Bliss: Financial Illiteracy, the Mortgage Market Collapse, and the Global Economic Crisis

The global economic crisis occurred, in part, because of a long standing, far-reaching problem in America: millions of people – both young and old – are financially illiterate. While financial illiteracy was not, of course, the sole cause of the economic crisis, its role was significant, and it has received too little attention up to this point. This article examines the poor state of financial literacy in America and analyzes how the financial illiteracy of millions of homebuyers contributed to the collapse of the housing market and helped spark the economic crisis. It reviews and evaluates the ongoing efforts – by both the government and the private sector – to tackle the issue. The article concludes by providing practical recommendations to help government policy makers and private financial literacy advocates address the financial illiteracy problem.

Refinancing Trends among Lower Income and Minority Homeowners during the Housing Boom and Bust

This article examines trends in mortgage refinancing activity during the housing boom and bust, with a focus on homeowners in lower income and minority market (LIMM) areas. Unlike any other period in recent history, during the boom LIMM homeowners refinanced their mortgages more frequently than non‐LIMM homeowners. This occurred primarily among borrowers for whom the refinance option was not in‐the‐money, and it is likely attributable to the concurrent growth of subprime, cash‐out refinancing. Following the 2007 mortgage market collapse, however, LIMM homeowners were less likely to refinance. This can be explained in part by systematic differences in home equity levels across borrowers.

What role did piggyback lending play in the housing bubble and mortgage collapse?

We examine the use of simultaneous close junior lien lending (“piggybacks”) over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and Zip code-level data over the period 2001–2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subsequent years, and this relation is strongest for non-owner-occupied properties. The pattern, however, appears to be limited to the use of subprime piggybacks, rather than a more general phenomenon. Using a topology-based housing supply elasticity measure as an instrument for house price growth, we further confirm that the strong association of subprime piggyback origination with worse loan performance was not driven by the endogeneity of house price appreciation.

What Role Did Piggyback Lending Play in the Housing Bubble and Mortgage Collapse?

We examine the use of simultaneous close junior lien lending (“piggybacks”) over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and zip code-level data over the period 2001-2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subsequent years, and this relation is strongest for non-owner occupied properties. The pattern, however, appears to be limited to the use of subprime piggybacks, rather than a more general phenomenon. Using a topology-based housing supply elasticity measure as an instrument for house price growth, we further confirm that the strong association of subprime piggyback origination with worse loan performance was not driven by the endogeneity of house price appreciation.

Mortgage Market Reform and the Fallacy of Self-Correcting Markets

The article discusses the mortgage market collapse and reform effort from the persepctive of the underlying real estate transaction. It suggests a series of regulatory and transactional reforms to consider for improving the soundness of the underlying real estate transaction and the operation of the primary mortgage markets. These reforms include: taking steps to reduce speculation in housing prices; eliminating incentives for over borrowing and over lending; and, adjusting the structure of the underlying real estate transaction to undermine an inverse prisoner’s dilemma problem. It also also suggest that lawyers can add value to the underlying transaction but there is a need to make lawyer participation financially viable. The full article, new to SSRN, is attached and available for downloading.

Individual Borrower and Regional Factors Contributing to Subprime and Prime Mortgage Delinquency and Default Rates: An Analysis by Origination Vintages and Projections for 2009

This study looks at the causes of the residential real estate and mortgage market collapse in terms of the delinquency and default experience of subprime, Alt-A and Prime mortgages at the individual borrower level in metropolitan (MSA) housing markets. It is recognized that not all high risk loans will become delinquent and/or default and so the study attempts to develop proxies of loan and borrower factors that indicate the profile of those loans and borrowers most likely to default taking into consideration the characteristics of the MSA housing markets. Consideration of the MSA characteristics is an attempt to address the question of why there occurred so many defaults during a period of no recession and a high rate of employment. To do this it is recognized that borrowers’ willingness to pay depends largely on their desire to be a home owner rather than an investor in a residential property. To capture this desire, variables from the Loan Performance data base on loan and borrower characteristics at the time of loan origination are used. This will develop a cross-section analysis of delinquency and default rates of residential, subprime, Alt-A and Prime mortgages. The hypotheses tested represent the effects of loan and borrower level characteristics and MSA economic factors, such as MSA employment growth, unemployment rate, household income and housing price changes and their volatility on the level of delinquency and default rates on mortgages of different types and differing origination dates (vintages). From a previous study (Hanweck 2008) that aggregated individual loan data to the MSA level, we found that loan and borrower level characteristics such as loan-to-value ratio weighted by original loan balances, the weighted proportion of loans that have no documentation or the borrowers’ weighted FICO score and MSA level economic factors such as employment growth and house price index rates of change are highly statistically significant and economically important in explaining MSA loan delinquency and default rates over the 359 MSAs for 2005 and 2006 vintages mortgages. Using the 2006 vintage parameters delinquency and default rates for the 2007 vintage loans were projected by MSA.The uniqueness of the proposed study, that the Q Group Research funding will permit, is that it will develop estimates of individual loan level conditional probabilities of borrowers moving from one payments’ status to another – current to 30-days delinquent to 90-days delinquent to 180-days delinquent to default, ROE or foreclosure. The data is from Loan Performance Corp. and is collected from securitizations on a monthly basis for the years 2004 to 2009. The results of this study can be used by investors to more efficiently value the conditional likelihood of default, expected losses due to default and portfolio retention, and potential recoveries from mortgage modifications or sale. The probability of severe delinquency or default within any specified period from a specified date can be estimated conditional on loan payment status, estimated LTV, other loan and borrower characteristics and metropolitan area economic conditions including house price trends.

Effect of Financial Crisis over Mergers and Acquisitions in GCC Countries

The merger and acquisition (M&A) activities have grown significantly around the world over the last two decades, the amount and volume of mergers and acquisitions is reaching a record braking levels. Major factors underlying this process are attributed to emergence of globalization, low cost funding and current financial turmoil, hence the need to create large entities to be able to compete for seeking out growth and profits. In addition, the increase in capital flows across national boundaries due to economic reform programs and market liberalization in developing countries. Another key factor causing growing M&A is the increased globalization of investment seeking higher rates of return and the opportunity to diversify risk, and many businesses recognize the uncompromising demand to venture overseas, or within their region. Mergers and acquisitions are nowadays frequent events in organizational lives. The two terms are normally used interchangeably in strategic investment decisions, distinction among mergers and acquisitions are necessary. Mergers of equals involve two entities of relatively equal stature coming together and taking the best of each company. An acquisition involves a much easier process of fitting one smaller company into the existing acquiring firm. As the current financial crisis, the financial markets are being subjected to the volatile and uncertain environment, and markets have entered a vicious cycle of asset deleveraging, price declines, and investor redemptions. Credit spreads spiked to distressed levels, and major equity indices dropped by about 25 percent in October 2008. Furthermore, Weakening global demand is depressing commodity prices. Oil prices have declined by over 50 percent since their peak in 12 July, 2008, retreating to levels not seen since early 2007 - reflecting the major global downturn. So, this situation will drive a slew of M&A activities across the region in the light of the financial turmoil and collapse of Mortgage market, because many industries and sectors have hit by this financial turmoil. In our view, the M&A activities will be one of the solutions that governments and institutional investors have in the current situation. Despite of the gloomy forecast of global economy, the local governments are still a vital part of M&A activities such as American International Group Inc., the New York-based insurer controlled by the U.S. government. But the forecast of M&A in 2009 refers to the appetite for the large takeover deals that fuelled the boom of the past two years has vanished. This may help drive smaller deals, as robust companies buy competitors weakened by the tight credit markets. Moreover, every sector will have a handful of acquisitive companies that can take advantage of relatively strong equity and credit positions.