Real Estate Lending Research Articles

Harnessing Potential: The Asia-Pacific Alternative Finance Benchmarking Report

Online alternative finance is developing rapidly in the Asia-Pacific region. It is characterised by innovative financial instruments and channels that fall outside the traditional avenues of capital raising and financial intermediation. From reward-based crowdfunding to peer-to-peer consumer and business lending (i.e. marketplace lending), to invoice trading and equity-based crowdfunding, these online alternative finance activities are directly connecting lenders to consumer and small business borrowers, raising venture capital for start-ups, funding the creative industries and creating new ways for individuals and institutions to choose how and to whom money is distributed, lent and invested. This benchmarking research is the first comprehensive study of the Asia-Pacific online alternative finance market. It has been conducted by an international research team from the Cambridge Centre for Alternative Finance at Cambridge Judge Business School, the Tsinghua University Graduate School at Shenzhen, the University of Sydney Business School, in partnership with KPMG and with the support of the ACCA and CME Group Foundation. Working with over 20 industry research partners, together we have systematically collected survey data from 503 leading alternative finance platforms operating in 17 Asia-Pacific countries and regions, out of which, 376 were from mainland China. Our definition of online alternative finance focuses on the provision of finance to individuals and businesses through alternative channels via online marketplaces outside of the banking system. It excludes activities such as peer-to-peer insurance, online money market funds or third-party payments. The report captures an estimated 70% of the visible market, and estimates that the total Asia-Pacific online alternative finance market grew 323% year-on-year to reach $102.81 billion USD in 2015. Market size & growth China is the world's largest online alternative finance market by transaction volume, registering $101.7 billion (or RMB 638.79 billion) in 2015. This constitutes almost 99% of the total volume in the Asia-Pacific region. In comparison, the total size of the UK online alternative finance market was $4.5 billion (or £3.2 billion) in 2015. The Chinese online alternative finance market grew from a relatively low base of $5.56 billion in 2013 to reach $24.30 billion in 2014 and then went on to reach $101.7 billion in 2015 - an average growth rate of 328% between 2013 and 2015. Marketplace/peer-to-peer consumer lending is the largest market segment in China with $52.44 billion lent, followed by marketplace/peer-to-peer business lending ($39.63 billion) and real estate lending ($5.51 billion). Online invoice trading reached $1.46 billion, equity-based crowdfunding recorded $948.26m and reward-based crowdfunding rose to $829.52m in 2015. Excluding mainland China, the rest of the Asia-Pacific region recorded a volume of USD $1.12 billion in 2015 with a 313% year-on-year growth rate from the $271.94 million raised in 2014. Japan's online alternative finance market accrued $360.23m in 2015, followed by $348.37m originated in Australia, $267.77m in New Zealand, $41.18m in South Korea, $39.91m in India and $39.76m in Singapore. However, New Zealand has the highest alternative finance volume on a per capita basis outside of China with $59.37 per capita, followed by Australia ($14.83), Singapore ($7.27), Japan ($2.83) and Hong Kong ($1.28). China's alternative finance market volume per capita stands at $74.54 in 2015. In terms of prevailing market segments outside of China, marketplace/peer-to-peer business lending was the largest with $355.51m, followed by market/peer-to-peer consumer lending ($326.22m), balance sheet business lending ($120.62m), invoice trading ($116.95m), reward-based crowdfunding ($81.22m) and equity-based crowdfunding ($64.13m).

The great mortgaging: housing finance, crises and business cycles

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the twentieth century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms, which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

Pushing Boundaries: The 2015 UK Alternative Finance Industry Report

In this study by the Cambridge Centre for Alternative Finance and Nesta, in partnership with KPMG and supported by the CME Group Foundation, we show how in 2015, the combined market activity of the UK online alternative finance industry grew to £3.2 billion; an 84% increase in growth compared to the £1.74 billion of 2014. Although the absolute year-on-year growth rate is slowing down (the growth rate between 2013-2014 was 161%) , the alternative finance industry still recorded substantive expansion across almost all models. Looking beyond the total market size, stand-out findings from this study include: Increased share of the market for business finance: In 2015, approximately 20,000 SMEs raised alternative finance through online channels, receiving £2.2 billion in business funding. Total alternative business lending reached £1.82 billion - 3.43% of gross national banks' lending to SMEs (BoE, 2014). Looking specifically at the small business sector, we estimate peer-to-peer business lending (excluding real estate lending) supplied the equivalent of 13.9% of new bank loans to small businesses in the UK in 2015 (BBA, 2014). Institutionalization is taking off: 2015 saw increased involvement from institutional investors in the online alternative finance market. This is particularly significant within peer-to-peer lending where we estimate that 32% of loans in peer-to-peer consumer lending, and 26% of peer-to-peer business lending, were funded by institutional investors. Donation-based crowdfunding is the fastest growing model: Although it started from a relatively small base (£2 million in 2014), donation-based crowdfunding is the fastest growing model in our 2015 study - up by 500% to £12 million. Real estate is the single most popular sector: It is clear that real estate is the most popular sector for online alternative finance investments and loans, with the combined debt and equity-based funding for real estate amounting to almost £700 million in 2015. Equity-based crowdfunding is growing fast, and secured its first exits: The second fastest growing sector in 2015 was equity-based crowdfunding, which was up by 295% from £84 million raised in 2014 to £332 million in 2015. Excluding real estate crowdfunding (£87 million), equity-based crowdfunding contributed £245 million worth of venture financing in 2015, which we estimate is equivalent to 15.6% of total UK seed and venture-stage equity investment (Beauhurst, 2015). In addition to this, 2015 saw the equity-based crowdfunding market report its first two exits, although this figure should be understood in the context of over 1,200 successfully funded deals between 2012 and 2015. The industry is satisfied with current regulation: When asked what they thought of the existing regulation of peer-to-peer lending and equity-based crowdfunding, more than 90% of platforms, for which this was relevant, stated that they thought current regulation was adequate and appropriate. The biggest risk is platform fraud or malpractice: The study asked platforms what they saw as the biggest risks to the future growth of the market. Ranking highest was the potential of a collapse of one or more of the well-known platforms due to malpractice, which was seen as a high risk to growth by 57% of surveyed platforms. Looking at the market trends in this year's study, it is clear that the online alternative finance industry is pushing boundaries of market growth, business models, public awareness, corporate partnerships, institutional funding, product innovation, international expansion as well as further regulatory support and policy acceptance. The UK online alternative finance market is growing increasingly complex, fluid and dynamic. We hope this study will shed some light on this fast evolving alternative finance landscape.

Breaking New Ground: The Americas Alternative Finance Benchmarking Report

Breaking New Ground: The Americas Alternative Finance Benchmarking Report

Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods

Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The PCA provisions require regulators to shut down banks before book capital becomes negative. We compare failures and FDIC losses on commercial banks in the pre-FDICIA commercial bank crisis of the mid-1980s to early 1990s with that in the recent financial crisis. Using a sample of community and mid-sized banks, we find that almost all the same bank characteristics predict failure and high losses in the two crises. Our results imply that for these classes of banks, the two crises were very similar. We find that the failure rate in the recent period was driven more by severe economic conditions than by the increased concentrations in real estate lending. The analysis suggests that the combination of PCA with higher capital levels helped reduce failure rates in the recent period. In contrast, the analysis suggests that the reforms did not help with FDIC losses. FDIC losses on failed commercial banks were approximately 14% of failed bank assets over the 1986-92 period but increased to approximately 24% over the 2007-13 period. We find that the increased losses are not explained by variations in bank balance sheets or local economic conditions. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses.

Simulating the cyclically adjusted returns to UK property lending

Purpose – The purpose of this paper is to provide an indication of the returns to commercial property lending over the last 30 years in the UK. Design/methodology/approach – There is no long-term index of the returns to commercial property lending in the UK. This paper provides a partial solution by simulating the performance of bullet loans of various vintages, based on the value movements of the IPD index. Findings – On average over the long-term debt returns are higher than equity returns. However, in certain periods, the losses incurred by real estate lenders are very large. Research limitations/implications – No account taken of risk mitigation strategies used by lenders such as cross-collateralisation. Practical implications – Provides an alternative approach to that recommended by the recent IPF “Vision For Real Estate Finance” Document based on the use of ICR. Makes the case for a loan equivalent of the IPD index. Social implications – Reduced chance of resource misallocation and recession due to excess real estate lending. Originality/value – Very limited information on private real estate debt returns.

Did the Financial Reforms of the Early 1990s Fail? A Comparison of Bank Failures and FDIC Losses in the 1986-92 and 2007-13 Periods

Two of the most significant banking reforms to come out of the banking problems in the late 1980s and early 1990s were the increase in capital requirements from Basel 1 and the prompt corrective action (PCA) provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The PCA provisions require regulators to shut down banks before book capital becomes negative. We compare failures and FDIC losses on commercial banks in the pre-FDICIA commercial bank crisis of the mid-1980s to early 1990s with that in the recent financial crisis. Using a sample of community and mid-sized banks, we find that almost all the same bank characteristics predict failure and high losses in the two crises. Our results imply that for these classes of banks, the two crises were very similar. We find that the failure rate in the recent period was driven more by severe economic conditions than by the increased concentrations in real estate lending. The analysis suggests that the combination of PCA with higher capital levels helped reduce failure rates in the recent period. In contrast, the analysis suggests that the reforms did not help with FDIC losses. FDIC losses on failed commercial banks were approximately 14% of failed bank assets over the 1986-92 period but increased to approximately 24% over the 2007-13 period. We find that the increased losses are not explained by variations in bank balance sheets or local economic conditions. Finally, we find that a discretionary accounting variable, interest accrued but not yet received, is predictive of both failure and higher FDIC losses.

Betting the house

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices' bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

Betting the House

Is there a link between loose monetary conditions, credit growth, house price booms, and financial instability? This paper analyzes the role of interest rates and credit in driving house price booms and busts with data spanning 140 years of modern economic history in the advanced economies. We exploit the implications of the macroeconomic policy trilemma to identify exogenous variation in monetary conditions: countries with fixed exchange regimes often see fluctuations in short-term interest rates unrelated to home economic conditions. We use novel instrumental variable local projection methods to demonstrate that loose monetary conditions lead to booms in real estate lending and house prices bubbles; these, in turn, materially heighten the risk of financial crises. Both effects have become stronger in the postwar era.

Efficiency Analysis of Taking out Real Estate Loans for Profit-Making Organizations

This article presents modified factors to analyze efficiency of getting real estate loans by profit-making organizations. These factors make allowance for the characteristic features of real estate lending transactions such as their long-termness, and uneven stream of cash-flows. Total value of net cash return from a real estate lending transaction is typically discounted revenue, which we calculated both pretax and post-tax. Taxation is shown to exert a considerable impact on discounted revenue position. Real estate lending transaction financial leverage effect is calculated for the whole duration of the investment project, with allowance for time value of money. DOI: 10.5901/mjss.2014.v5n24p70

The Great Mortgaging: Housing Finance, Crises, and Business Cycles

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

The Great Mortgaging: Housing Finance, Crises, and Business Cycles

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions

We investigate whether saving Wall Street through the Troubled Assets Relief Program (TARP) really saved Main Street during the recent financial crisis. Our difference-in-difference analysis suggests that TARP statistically and economically significantly increased net job creation and net hiring establishments and decreased business and personal bankruptcies. The results are robust, including accounting for endogeneity. The main mechanisms driving the results appear to be increases in commercial real estate lending and off-balance sheet real estate guarantees. These results suggest that saving Wall Street via TARP may have helped save Main Street, complementing the TARP literature and contributing to the cost-benefit debate.

The Relationship Between House Prices and Real Estate Financing in Kenya

In many countries, house price fluctuations which have been witnessed by the several booms and busts over the past two decades have been associated with financial instability. The degree to which such house price booms and busts have led to financial instability differs among countries because of the important differences in countries’ housing systems and the role that the government plays. The recent financial crisis has led to accelerated housing defaults in the U.S as well as in other countries, with millions of residential properties having negative equity mortgages with the outstanding loan balances being greater than the property value. Property prices in the Kenyan market have not been spared by the crisis being experienced. The Hass property index has been tracking property prices in the ‘upper and middle’ sectors of the Kenyan property market and has seen the average price in this sector rise from Ksh 15 million in 2006 to Ksh 20 million in 2010. The objective of the study was to determine the relationship between house prices and real estate financing in Kenya. Causal study design was employed in this research. Purposive sampling technique was used to select the sample. The study purposively selected a total of 20 respondents who formed the sample size of this study. The researcher administered a survey questionnaire to each member of the target population. Secondary data was collected for this study. Quantitative data collected was analyzed by the use of descriptive statistics using SPSS latest version (20.0). Regression analysis was done to establish the relationship between growth in Real Estate financing and house prices. The study found that the changes in housing prices are positively and significantly related to the long-term evolution of real estate financing. This result suggests that the evolution of housing prices is not triggered by bank real estate lending and that banks just accommodate real estate financing to the evolution of house prices. Though the study shows a bi-directional causality it concludes that the real estate market does not really affect housing price changes rather changes in housing prices do affect the amount of real estate financing.

Bank Corporate Governance and Real Estate Lending During the Financial Crisis

This paper examines the effects of bank corporate governance on real estate lending and loan losses during the recent financial crisis. The results indicate that banks with stronger corporate governance mechanisms had higher profitability during the period 2006-2009. Our findings on the effects of corporate governance on real estate lending performance are mixed and depend on the definition of the crisis period. Although banks with stronger governance practices had a lower amount of real estate loan losses during 2006-2008, our results also show that these banks experienced significantly larger losses in 2009.

The Great Mortgaging: Housing Finance, Crises, and Business Cycles

This paper unveils a new resource for macroeconomic research: a long-run dataset covering disaggregated bank credit for 17 advanced economies since 1870. The new data show that the share of mortgages on banks’ balance sheets doubled in the course of the 20th century, driven by a sharp rise of mortgage lending to households. Household debt to asset ratios have risen substantially in many countries. Financial stability risks have been increasingly linked to real estate lending booms which are typically followed by deeper recessions and slower recoveries. Housing finance has come to play a central role in the modern macroeconomy.

Bank Corporate Governance and Real Estate Lending During the Financial Crisis

This paper examines the effects of bank corporate governance on real estate lending and loan losses during the recent financial crisis. The results indicate that banks with stronger corporate governance mechanisms had higher profitability during the period 2006-2009. Our findings on the effects of corporate governance on real estate lending performance are mixed and depend on the definition of the crisis period. Although banks with stronger governance practices had a lower amount of real estate loan losses during 2006-2008, our results also show that these banks experienced significantly larger losses in 2009.

TROUGH TO PEAK: A NOTE ON RISK‐TAKING IN THE PACIFIC NORTHWEST'S BANKING SECTOR, 2001–2007

Using a cohort of 157 Federal Deposit Insurance Corporation insured banks based in the Pacific Northwest, this paper examines regional bank risk‐taking over the 2001–2007 economic expansion. The focus is on on‐balance sheet assets that carry a 100% risk weighting in the calculation of regulatory capital ratios. This study finds that Pacific Northwest banks significantly increased their share of 100% risk‐weighted assets between 2001 and 2007, largely through commercial real estate lending. Asset size, market concentration, age, metropolitan statistical area‐location, and balance sheet capacity for risk‐taking are statistically significant predictors of the change in the share of 100% risk‐weighted assets over the period of interest. (JEL G21, R11)

The Viability Of A Private Central Facility For Mortgage-Related Securities

The concept of a mortgage exchange has emerged as a topic of current discussion and debate. This study presents the results of a national survey of fund managers and advisors which attempted to determine the feasibility of a privately sponsored central facility for the creation and marketing of mortgage-related securities. The study discusses the methodologies of the research and presents the conclusions, The survey results suggest that such a central facility would be viable if the sponsors possessed experience in real estate lending, have a willingness to maintain direct contact with funds, are able to reduce commissions on transactions, provide the role of master servicer on the underlying mortgages, and structure the securities according to certain specifications such as ratings in terms of risk class, call protection, insurance, liquidity in a secondary market, geographic diversification, and inflation indexation.

Liquidity risk exposure for specialised and unspecialised real estate banks

PurposeThe purpose of this paper is to compare banks specialised on real estate lending with the overall market in order to the test if they are more or less exposed to liquidity risk.Design/methodology/approachFollowing the approach proposed by the Basel Committee in order to evaluate the bank liquidity exposure, the paper compares the value of these measures between the real estate lending banks (REBs) and all other banks for the Italian market. A panel regression analysis is also performed in order to identify the main drivers of the liquidity risk measures for the two types of banks.FindingsThe paper finds that no significant differences exist between REBs and the overall system if liquidity risk measures used by regulators in order to supervise the banking system are taken into account. Normally liquidity exposure by this type of bank is significantly affected by interbank market dynamics.Research limitations/implicationsThe paper considers only one market in order to test the fitness of the regulatory approach for the REBs and does not take into account the off balance sheet exposure.Practical implicationsEven if REBs suffer from a misalignment between the asset and liability duration, the supervisory authority selects measures that do not penalise them.Originality/valueThe paper represents one of the first empirical analyses on the impact of regulatory requirements for liquidity management by the Basel Committee in order to test if the rules proposed could penalise banks specialised in real estate loans.