Mortgage Origination Research Articles

Was the U.S. Crisis a Financial Black-Hole?

This paper argues that the U.S. crisis is a new type of crisis: a financial black hole. Financial black-holes are characterized by the breaking-up of credit market discipline and the large-scale financing of negative net present value projects. In a theoretical model, the paper explains how the interaction of perceived government guarantees and the ability to issue catastrophe-bond-like liabilities generates black-holes. The paper then shows that key facts of the recent U.S. crisis can simultaneously be rationalized by the black hole equilibrium: Between 2003 and 2006, the origination of catastrophe-loan type mortgages exploded, as well as the issuance of 'Private Label' mortgage-backed securities that helped off-load them into the market. During the same period, there was a massive increase in the origination of mortgages to borrowers with limited repayment ability, absent a continuous increase in home prices. While this situation should have led to an upward repricing of the risk associated with Private Label MBS, the contrary occurred and the spread on these securities actually declined. While each of these facts in isolation can be interpreted differently, the strength of the black-hole explanation is its ability to account for the combination of these key facts.

Land use regulations and the returns to low-income homeownership

I investigate the relationship between land use regulations and the house prices of urban low-income homeowners in the United States between 1998 and 2010. Because low-income homeowners generally hold a larger fraction of their wealth as home equity and are less likely to sustain homeownership, the overall financial position of this population is especially dependent on house price movements during short holding periods and the timing of house purchase and sale. The data used for analysis include zip-code-level house price estimates provided by Fannie Mae and proprietary mortgage origination data for a representative sample of low-income US homeowners who received community reinvestment mortgages between 1998 and 2004. I estimate a series of linear mixed-effects models to predict house price appreciation and the risk premium associated with investment in housing as opposed to a risk-free asset. Controlling for a variety of related factors, including land scarcity and subprime lending activity, I find that land use regulations are associated with greater house price volatility and a greater risk premium for urban low-income households. Thus, the results suggest that the dependence of low-income homeowner wealth on the timing of house purchase and sale is weaker in less regulated markets.

The Macro-Economy and Housing Credit Market in Ghana

The housing finance market of Ghana is underdeveloped. A number ofstudies have suggested that the weak and unstable macro-economicenvironment in the country is responsible for this. These studies however,showed the relationship between the country’s mortgage market and themacro-economy through qualitative techniques. This paper, examines thisrelationship via regression models. It regressed mortgage originations in the country on inflation, interest, and exchange rates to determine their impacts on mortgage market activities. It found out that the only significant factor influencing mortgage origination in the country is the exchange rate. It suggests that this exists because mortgages in Ghana are denominated in foreign currencies notably the United States dollar and that mortgagees focus on Ghanaian residents abroad or Ghanaians with foreign currency denominated income. It notes that resident Ghanaians have been priced out of the mortgage market by high exchange rate levels and the “dollalization” of mortgages in the country. It recommends that policy must focus on addressing the exchange rate problem in other to make the mortgage market attractive to both mortgagees and resident Ghanaians. Key Words: Mortgage originations, Macroeconomic Factors, HousingCredit, Ghana

Monetary Policy and Risk-Shifting: Evidence from the Subprime Market

Using loan level data, we provide evidence consistent with risk-shifting in the lending behavior of a large subprime mortgage originator { New Century Financial Corporation { starting in 2004. This change follows the monetary policy tightening implemented by the Fed in the spring of 2004, which resulted in an adverse shock to the large portfolio of loans New Century was holding for investment. New Century reacted to this shock by massively resorting to deferred amortization loan contracts (\interest-only loans). We show that these loans were not only riskier, but also that their returns were by design more sensitive to real estate prices than standard contracts. New Century was thus financing projects with a high beta on its own survival, as predicted by a standard model of portfolio selection in financial distress. Our findings shed new light on the relationship between monetary policy and risk taking by financial institutions. They also contribute to better characterizing the type of risk taken by financially distressed firms.

Reforming the Regulation of the Market for Home Loans

This article explores the content and institutional context for recently revised regulation of the markets for residential mortgages. It proposes a market-sensitive reading of the Wall Street Reform and Consumer Protection Act, and suggests that the Bureau of Consumer Financial Protection created under the Act should be understood to balance consumer protection with concerns for the liquidity and safety and soundness of the financial markets. In particular, it argues that the Act has the potential to create a regulatory architecture that protects both consumers and the capital markets by distinguishing between financial products that can safely be financed through the capital markets and those that pose greater risks, and should, by design, be more illiquid. This coordinated architecture can be implemented, we believe, by the new Bureau of Consumer Financial Protection through its related powers to prohibit unfair lending practices, promulgate safe harbor notices and implement certain minimum mortgage origination standards. However, the devil will be in the details - both substantive and institutional - and, in our view the new Bureau will have to flex its rulemaking muscle a bit to fully implement that vision.

Technologies To Improve The Decision-Making Process Of Real Estate Appraisers: XML, Intelligent Agents, Avms, And Web Services

<p class="MsoBlockText" style="margin: 0in 0.5in 0pt 1in;"><span style="font-style: normal; mso-bidi-font-style: italic;"><span style="font-size: x-small;"><span style="font-family: Times New Roman;">Pressure to expedite mortgage originations has prompted the need to accelerate the appraisal process for residential real estate.<span style="mso-spacerun: yes;">  </span>The appraisal aspect of a mortgage origination is one area where decision support can play a major role in redefining the process. This study presents propositions that incorporate new technologies into the decision-making process of a residential real estate appraiser.<span style="mso-spacerun: yes;">  </span>The four propositions deal with intelligent agents, XML, automated valuation models (AVMs), and web services. Intelligent agents have the ability to redefine how appraisal firms create, maintain, and update their databases.<span style="mso-spacerun: yes;">  </span>XML offers enhanced data handling capabilities, while automated valuation models offer the ability to drastically reduce the time required to render an estimate of value. These two technologies can be combined with web services to make the real estate appraisal application available anywhere and anytime of the day.</span></span></span></p>

Why is the Market Share of Adjustable-Rate Mortgages so Low?

Over the past several years, U.S. homebuyers have increasingly favored fixed-rate mortgages over adjustable-rate mortgages (ARMs). Indeed, ARMs have dropped to less than 10 percent of all residential mortgage originations, a near-record low. One might speculate that the decline in the ARM share has been driven by one-off factors relating to the financial crisis. However, a statistical analysis suggests that recent trends can largely be explained by the same factors that have historically shaped mortgage choice - most notably, the term structure of interest rates and its effects on the relative price of different types of mortgages. Supply-side factors, in particular a rise in the share of mortgages eligible to be securitized by the housing government-sponsored enterprises, also play a role in the low current ARM share.

What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties' economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.

What Fuels the Boom Drives the Bust: Regulation and the Mortgage Crisis

We show that the lightly regulated non-bank mortgage originators contributed disproportionately to the recent boom-bust housing cycle. Using comprehensive data on mortgage originations, which we aggregate at the county level, we first establish that the market share of these independent non-bank lenders increased in virtually all US counties during the boom. We then exploit the heterogeneity in the market share of independent lenders across counties as of 2005 and show that higher market participation by these lenders is associated with increased foreclosure filing rates at the onset of the housing downturn. We carefully control for counties' economic, demographic, and housing market characteristics using both parametric and semi-nonparametric methods. We show that this relation between the pre-crisis market share of independents and the rise in foreclosure is more pronounced in less regulated states. The macroeconomic consequences of our findings are significant: we show that the market share of these lenders as of 2005 is also a strong predictor of the severity of the housing downturn and subsequent rise in unemployment. Overall our findings lend support to the view that more stringent regulation could have averted some of the volatility on the housing market during the recent boom-bust episode.

Changes in the Mortgage Market Since the Crisis

It appears that mortgage origination and securitization is currently “in limbo”: Private securitization has all but disappeared and is being absorbed by government- sponsored enterprises

Fannie Mae and Freddie Mac: Legal Implications of a Successor Cooperative

A financial cooperative of mortgage originators is capable of assuming the core securitization functions of Fannie Mae and Freddie Mac as part of a scheme to dismantle these institutions. Such a cooperative would offer advantages in maintaining adequate capitalization and could provide an effective governance structure. A federally chartered, Subchapter T cooperative appears preferable for that purpose.

Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises

This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.

A Real Estate Note: The Relationship between Market and Population-Average Mortgage Rates

The impact of changes in market mortgage interest rates on the average mortgage interest rate for all owner-occupied homes depends on the rate of new mortgage originations. The combination of low interest rates and robust mortgage originations after 2001 led to a 1400 basis point decrease in the average 30-year fixed- ate interest rate on owner occupied homes between 2001 and 2005. However, a 1300 basis point decrease in the market interest rate on 30-year fixed mortgages over the 2007 to 2009 time period led to a relatively modest 290 basis point decrease in the population average 30-year fixed-rate interest rate. This finding raises the question of whether more lenient lending requirements on applications to refinance loans could reduce mortgage defaults during the current housing crisis.

Information Failure and the U.S. Mortgage Crisis

This paper argues that during the housing bubble, housing finance markets failed to price risk correctly because of information failure caused by the complexity and heterogeneity of private-label mortgage-backed securities and structured finance products. Addressing the informational problems with mortgage securitization is critical not just for avoiding future housing bubbles but for rebuilding American housing finance. The continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression, depends on the continued viability of securitization. The paper proposes that mortgage securitization and origination be standardized as a way of reducing complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

Bank Branch Presence and Access to Credit in Low‐ to Moderate‐Income Neighborhoods

Banks specialize in lending to informationally opaque borrowers by collecting soft information about them. Some researchers claim that this process requires a physical presence in the market to lower information collection costs. This paper provides evidence in support of this argument in the mortgage market for low‐income borrowers whose access to credit is limited by their inadequate credit histories. Mortgage originations increase and interest spreads decline when there is a bank branch located in a low‐ to moderate‐income neighborhood.

Securitisation and Banks’ Net Interest Margins*

This article develops a theoretical model of the effect of securitisation on banks’ net interest margins (NIMs). The model incorporates a dual role for securitisation. The direct effect accounts for the influence of securitisation on banks’ funding costs. The indirect effect recognises that the development of securitisation markets made it possible for mortgage originators to compete with banks, which contributed to a decline in banks’ market power and a fall in their NIMs. In estimating the model econometrically, this article finds evidence that both the direct and indirect effects worked to reduce Australian banks’ NIMs prior to the onset of the credit crisis.

Survival Skills Amid the Rubble: Life as a Trustee in a Market Collapse

This article provides an overview of the experience of trustees in the structured finance market during the market crisis of the past few years, by describing the major events that marked the evolution of the collapse and explaining how each of those developments affected or created challenges for trustees. The article discusses challenges resulting from the financial collapse of the mortgage originator and servicer industry, and concerning the enforcement of mortgage loan repurchase obligations and loan modifications. It explains how trustees found themselves involved in a variety of litigation, some of an unexpected nature, and more unexpectedly found themselves center-stage in a variety of political pressures and developments. It also describes how they are now keenly interested in the legislative and regulatory initiatives that remain to be completed. The article discusses the unique combination of factors that led to the collapse of the CDO market, some of the issues faced as CDOs went into default and liquidation, and how multiple tranche “warfare” created a variety of difficulties for trustees. It also discusses how the quality and clarity of many transaction documents proved to be disappointing or lacking, opening the door to bitter disputes over interpretation in some cases and in others causing trustees to bring matters into court to obtain guidance and protection. Lastly, it discusses briefly some of the issues faced by trustees in connection with the Lehman bankruptcy. <b>TOPICS:</b>CLOs, CDOs, and other structured credit, MBS and residential mortgage loans

Loan-Level Disclosure in Securitization Transactions: A Problem with Three Dimensions

The collapse of the credit markets revealed that information critical to assessing the quality of many mortgage backed securities was unavailable. When subprime losses began to mount in 2007 and 2008, analysts were unable to obtain information necessary to assess the performance characteristics of loans that had first been securitized into mortgage backed securities and then often re-securitized – with tranches of initial securities being merged with tranches from other offerings into collateralized debt obligations (CDOs) and other complex capital market instruments. Critical information was unavailable because there were no common requirements or formats for reporting such information. In the absence of loan level information, it was impossible to distinguish good loans from bad one or to value CDO and associated derivatives whose performance depended upon underlying loan pools. With analysts unable to value securities appropriately, demand dried up and securities were marked to an illiquid market. As a result of these problems, many are now arguing for new reporting requirements for securitized loans, and the recently adopted Dodd-Frank Wall Street Reform and Consumer Protection Act mandates the promulgation of new disclosure requirements for securitization transactions. This chapter examines the degree of loan-level transparency (or lack thereof) in securitization transactions, spells out the implications of the current lack of transparency for public policy, and makes the case for new regulations that mandate public disclosure. Not only would such requirements improve the pricing of investments in securitization transactions, these requirements might also improve the rate of mortgage renegotiations and enhance the capacity of public authorities to identify unfairly priced mortgage originations and discriminatory lending practices in violation of the Equal Credit Opportunity Act. The paper concludes with a discussion of the pros and cons of releasing information on loan-level data publicly as opposed to limiting release to government authorities. Finally, the chapter explores possible interactions between other proposals to reform assets securitization and requirements focused on loan-level disclosures.

Mortgage origination fraud and the global economic crisis

Mortgage origination fraud and the global economic crisis

Diagnostics of white‐collar crime prevention

Nguyen and Pontell’s (2010, this issue) article makes a strong case that white-collar crime played an important role in the origins of the global financial crisis; specifically, in waves of mortgage origination fraud. Particularly telling is the 2006 Federal Financial Crimes Enforcement Network (FinCEN) report of a 1,411% increase in mortgage-related suspicious activity reports between 1997 and 2005, 66% of which involved material misrepresentation or false documents. Then another 44% increase was reported between 2005 and 2006. The BasePoint Analytics (2007) analysis of 3 million loans, which indicated that 70% of early payment defaults had fraudulent misrepresentations on their original loan applications, was another early warning signal that the mortgage issue was a crime problem. These data also demonstrated that it was a consequential problem, as the loans with fraudulent misrepresentations were five times as likely to go into default. The Federal Bureau of Investigation began issuing public warnings in 2004, claiming that it was seeing a spike in mortgage fraud cases in the mid-2000s (Black, 2009). Even earlier than that, a more abstract early warning drew on the lessons of the history of the savings and loans debacle from Nguyen and Pontell and fellow scholars such as Bill Black (Black, 2005; Black, Calavita and Pontell, 1995; Calavita, Tillman, and Pontell, 1997; Tillman and Pontell, 1995). Of course, other layers of causation were found in the structures of the derivatives market, the bonus culture on Wall Street, the captured ratings agencies that failed to do their job, the structural imbalances of American indebtedness to China to pay for Chinese exports to the United States, and the defective quantitative risk models applied by the financial industry (Braithwaite, 2009; Johnson, 2009; Krugman, 2008; O’Brien, 2009; Partnoy, 2003). Yet Nguyen and Pontell’s (2010) emphasis on the proximate causes in mortgage fraud is well placed for two reasons. First, many other layers of causation are extremely hard to fix and