Real Estate Loans Research Articles

Commercial real estate exposure and bank counterparty risk

Detailed analysis of December 2023 bank regulatory data suggests that unrealised interest rate losses in the banking system amplify banks' true commercial real estate (CRE) loan concentrations making CRE exposures much more consequential than traditional supervisory CRE loan concentration measures suggest. Taken together, weak demand for several types of commercial properties, sustained unexpectedly high interest rates and the concentration of CRE loans in many bank portfolios may magnify the risk of many financial institution's uncollateralised exposures to bank counterparties.

Environmental, Social, and Governance Scores and Loan Composition Inside United States Banks

We analyze the loan portfolios of United States banks from 2013 to 2023, showing that high environmental, social, and governance (ESG) banks have larger shares of consumer loans and commercial loans and smaller shares of construction loans and real estate loans. We also find that the governance pillar (G) is more tightly related to the bank loan composition compared to the environmental (E) and social (S) pillars. Furthermore, we show that construction loans and real estate loans decrease more considerably with bank ESG scores inside countries with high gas emissions, i.e., where ESG issues would arguably be more serious. Our interpretation is that sustainable banks are reluctant in lending money for real estate projects, exposing them to potentially high ESG risk. These findings contribute to developing a deeper insight about the relationship between ESG and bank lending, which, in the previous literature, has been treated more frequently in aggregate terms instead of separating loan types. Our outcomes suggest that sustainability is crucial for the availability of funds in the real estate sector, delivering important insights to bank and real estate managers, besides policy makers.

Loan growth and quality over the credit cycle

This study investigates the intertemporal relationship between loan growth and quality using annual data from U.S. commercial banks from 1992 to 2019. Our findings reveal that banks with higher loan growth over the preceding three years incur significant subsequent loan losses. This trend is evident in both real estate loans and commercial/industrial loans. The cross-sectional rolling regressions indicate that this relationship evolves over the credit cycle. Banks that rapidly expanded their loan portfolios before the financial crisis faced higher risks and considerable loan losses. Conversely, banks that deleveraged during and after the crisis experienced lower loan losses in subsequent years.

What charge-off rates are predictable by macroeconomic latent factors?

Charge-offs provide critical insights into the risk level of loan portfolios within the banking system, signaling potential systemic risks that could lead to deep recessions. Utilizing consolidated financial statements, we have compiled the net charge-off rate (COR) data from the 10 largest U.S. bank holding companies (BHCs) for disaggregated loans, including business loans, real estate loans, and consumer loans, as well as the average COR for each loan category among these top 10 banks. We propose factor-augmented forecasting models for CORs that incorporate latent common factor estimates, including targeted factors, via an array of data dimensionality reduction methods for a large panel of macroeconomic predictors. Our models have demonstrated superior performance compared with benchmark forecasting models, particularly well for business loan and real estate loan CORs, while predicting consumer loan CORs remains challenging especially at short horizons. Notably, real activity factors improve the out-of-sample predictability over the benchmarks for business loan CORs even when financial sector factors are excluded.

Zombie lending, labor hoarding, and local industry growth

After the bursting of real estate bubbles in 1991, Japanese banks continued lending to unviable firms to conceal problem loans. We revisit Japan’s experience and propose a new mechanism via which banks’ loan-evergreening policy undermines allocative efficiency across industries by focusing on construction and real estate loans. Namely, banks’ continuing support for construction and real estate firms encourages labor hoarding in unviable construction projects. Since construction projects predominantly use low-skilled workers, banks’ loan-evergreening policy in these troubled sectors may depress other low-skilled industries. Based on the industry-level data in each of Japan’s 47 prefectures from 1992 to 1996, we document empirical facts consistent with this hypothesis. On average, low-skilled industries experienced disproportionately slower output and employment growth and more sluggish growth in the number of new establishments in prefectures where the share of bank loans to local construction/real estate sectors increased more after construction boom ended.

In Debt but Still Happy? Homeownership and the Satisfactions with Housing and Life

We investigate the relationship between homeownership and life as well as housing satisfaction. Following several studies, we confirm the positive relationship between housing satisfaction and homeownership using panel data from Germany. Contrary to most of the literature, we find no positive significant effects of a home purchase on life satisfaction in the long-term. Analyzing short-term effects in an event-study design, we show that both life and housing satisfaction anticipate the acquisition and adapt shortly after. Debt-free buyers, however, do not experience anticipation or adaptation effects at all. Comparing outright homebuyers to debt-financing owners, we show that having a real estate loan affects homeowners’ life satisfaction negatively. The larger the mortgage burden relative to the household income and the last rent paid, the larger is the negative effect on life satisfaction. We conclude that the mortgage burden of a home purchase can offset the positive effect of homeownership.

Could financialisation explain why developers are building more expensive houses? Evidence for Malaysia

Purpose The purpose of this paper is to examine the effects of financialisation on the changing structure of housing supply in Malaysia. The share of newly launched sub-MYR250,000 houses has been decreasing continuously in the past decade. This implies that housing developers are launching more expensive houses. The greater focus on higher cost housing could be attributed to inflation. But while input cost is rising, the housing sector has also become increasingly financialised. This claim can be supported by the rising share of mortgage and real estate loans in gross domestic product. Financialisation is a process in which the financial sector becomes more dominant relative to the real sector. The extent to which this process is responsible for the changing structure of housing supply in Malaysia is investigated. Design/methodology/approach A survey of the literature suggested that the decreasing the proportion of newly launched sub-MYR250,000 housing could be result of rising input cost, greater degree of financialisation and changing market concentration. Thus, long-run cointegrating equations were formulated and estimated. These equations linked housing share with financialisation, market structure and input cost. The quantitative and qualitative impact of financialisation on the structure of housing supply is of interest. Findings The analyses of secondary data suggested that financialisation and input cost did indeed contribute to the decrease in proportion of newly launched sub-MYR250,000 housing. However, the impact of market concentration on housing share was ambiguous. This conclusion survived several robustness checks. Practical implications The financialisation of the housing sector implies that developers are increasingly building for profits instead of accommodating the social objective of providing shelter. This result is unsettling because access to adequate housing is a human right. The transformation of housing from the concept of a shelter to a tradable, money-making asset could be a major contributor to the declining housing affordability in the country. Thus, efforts to improve affordability must take account of the effects of financialisation. Originality/value An empirical framework for assessing the changes in the structure of housing supply was developed. Existing studies tended to focus only on the volume of housing supply. It is a comprehensive study on changes in the structure of housing supply. Second, while existing studies on the financialisation of housing are mostly qualitative in methodology, this paper offers a quantitative assessment of the financialisation in the housing sector.

Inflationsberechnung: Zinspolitik der EZB wird als Inflationstreiber statistisch nicht erfasst

Abstract After ten consecutive increases in the prime rate by the European Central Bank’s (ECB), the question arises: What significance do these measures have, both indirectly for the interest rates increased at all value-added levels on the corporate side, and for households? While the prices for rents, being the largest component, are factored into inflation calculations, the dramatically increased interest rates for real estate loans – specifically for owner-occupied housing – are not considered at all. In this article, an extension of the calculation scheme is demonstrated to make transparent the direct effect of the prime rate increase on real estate owners’ expenses.

Fiscal and real repercussions of the Central Bank of Iraq’s real estate initiatives by using Multiple Correspondence Analysis

The importance of the study stems from the fact that Iraq’s economy is facing a housing crisis, especially in the Iraqi capital, Baghdad, great demographic pressure due to pronounced population growth over the past two decades. The Central Bank of Iraq undertakes several initiatives represented in granting real estate loans, mainly through the Real Estate Bank at very low interest, and in the last two years, the interest has become zero. The purpose of the study is to analyze the fiscal implications of the Iraqi central bank’s real estate initiatives, as well as its real impact on the spatial dimension of the Iraqi governorates through new housing in those governorates. Using data mainly from the Central Bank of Iraq’s bulletins, the study obtained a 6-year sample of study variables for 15 Iraqi governorates. Multiple Correspondence Analysis (MCA) was used to test such repercussions. One of the study’s findings is that the greatest impact of the Iraqi central bank’s real estate initiative was the fiscal and real repercussions for the year 2021, and the highest relative impact was in Baghdad governorate, with fiscal and real returns distinct from the rest of the governorates. One of the conclusions reached is that the strength of the fiscal repercussion was more important, more significant, and stronger than the real impact of the initiatives of the Central Bank of Iraq. Similarly, it was concluded that Baghdad was the first governorate that benefited from the effects of the initiative.

Determinants of the personal savings rate in the Kingdom of Saudi Arabia using time savings deposits, 2012–2022

Personal saving is an important indicator of future economic prosperity. Despite the growth in gross domestic product per capita (GDPPC) from 2012 to 2022 in the Kingdom of Saudi Arabia (KSA), the personal savings rate remains low. Only a few studies have explored savings in KSA, but no study that used time savings deposits (TSD) to measure personal savings exists. Thus, this study aims to investigate the determinants of personal savings employing TSD. Using data from the Saudi Central Bank from 2012 to 2022, this study empirically examines the determinants of TSD. The autoregressive distributed lag cointegration technique determines the long-run relationship between the study's variables. The study finds that GDPPC, deposit interest rates (DIR), consumer loans (CLs), and real estate loans (RELs) significantly impact personal savings. Only GDPPC and RELs have a significant negative impact on personal savings. The study is among the few to examine savings in KSA but, unlike other studies, used TSD as a measure of personal savings. In conclusion, several implications and recommendations for policymakers and financial institutions were presented.

Research on the Formation Mechanism, Contagion Effect and Regulatory Strategy of Digital Asset Price Bubble Risk in the Information Age

Abstract As an emerging financial instrument, the risk of asset price bubbles is becoming more and more prominent and has a far-reaching impact on the global financial market. Based on the ADF model and PSY algorithm, the study constructs an asset price bubble identification model, explores the formation mechanism of asset price bubbles in the financial market, the contagion effect of asset price bubbles in the inter-market, and ultimately puts forward suggestions for targeted regulatory strategies. In the numerical simulation of the formation mechanism of asset price bubbles, both Bubble 1 and Bubble 2 experience 10 periods, and the peaks of the two bubbles appear at t=14 and t=34.5, respectively. The rate of rise of asset prices is slower than the rate of decline, and the impact on the financial market is greater when the financial asset bubble bursts. There is a two-way bidirectional contagion effect between the three markets of stock, bond, and property. Therefore, regulation of asset price bubbles should focus on improving the stock market trading system, publicizing and educating, and restricting real estate loans.

Community banks' capital requirements and regional housing tenure

AbstractBank capital requirements aim at reducing the likelihood of banks' failure. However, these policies may generate externalities on the overall economy. By investigating the pathways from capital requirements to housing tenure using structural equation modelling, we show that community banks' capital requirements increase the gap between the regional real estate loans‐based and non‐real estate loans‐based housing purchase rate and act as driving factors of housing market imbalance. The drop in residential real estate loans caused by the increase in capital requirements has two opposite effects: the direct effect motivates residents to rent properties, while the indirect effect motivates residents to purchase them due to the fall in housing prices. When both effects exist in housing purchases with real estate loans, the former effect is more influential than the latter one. Our findings suggest that the impact of capital requirements on housing tenure will depend on residents' reliance on real estate loans. If a housing purchase requires real estate loans, capital requirements will have a negative impact on the housing purchase, and vice versa.

Does cross-industry loan diversification reduce bank systemic risk? Evidence from listed banks in China

ABSTRACT Banking plays a crucial role as the most significant financial intermediary, and the effectiveness of its diversification strategy aimed at reducing individual bank systemic risk is a significant topic in both theory and practice. In this study, we investigate the impact of cross-industry loan diversification on bank systemic risk using data from listed banks, and reveal a significant positive correlation, indicating a clear‘diversification systemic risk’ effect. This effect remains robust across a series of robustness tests. Further research reveals the influence of cross-industry loan diversification on bank systemic risk operates primarily through the channel of interbank asset similarity. Additionally, we find the‘diversification systemic risk’ effect is particularly prominent among joint-stock banks, those with high interbank deposits，and those with high real estate loans. These findings hold important reference value for the ongoing reforms and practices in China aimed at preventing bank systemic risk.

Schumpeterian creative destruction and temporal changes in business models of US banks

Schumpeter theorizes that capitalism is characterized by a constant process of creative destruction. Newcomers introduce disruptive innovations and technologies that replace older, less efficient business practices. Thus, established firms must either continually adapt or perish. Christensen (1997) argues that large, established firms cannot innovate as fast as newcomers and thus are likely to perish over time. We test these predictions in the setting of the United States banking sector. We examine banks' credit and liquidity risks as proxies for their business models, as well as their reliance on brokered deposits, commercial real estate loans, off-balance sheet items, and noninterest income as proxies for operational strategies. We find that banks' credit and liquidity risks increased significantly over the last 40 years or so, indicating a steady change in banks' business models. This trend stems primarily from progressively aggressive business models introduced by incoming cohorts. Older cohorts respond to changing market conditions by increasing the aggressiveness of their own business models, but not as much as the newcomers. Surprisingly, surviving large banks among older cohorts change their business models faster than smaller banks from the same cohorts. Thus, while we find support for Schumpeterian creative destruction and Christensen's (1997) arguments, we also find that large and established banks are better able to adapt to new market conditions, perhaps because they have superior access to resources and talent necessary to implement transformation. Our findings at least partly explain why the dominant players in the US banking sector have remained the same decade after decade.

Investigation of Current Industry Strategies to Reduce the Cost of Financing a Manufactured Home

The cost and process when financing manufactured homes (MHs) are the greatest barriers to owning them. MHs are considered personal properties and do not qualify for conventional real estate loans with lower interest rates than personal (chattel) loans. The resulting higher financing costs present a major obstacle to the lower-income demographic, who are the predominant purchasers of MHs. Recently, strategies have been implemented to permit MHs to be considered real property; therefore, making them eligible for a conventional mortgage. However, most MHs do not qualify for conventional loans and must apply for higher-interest chattel loans. To the best of the authors’ knowledge, this area has not been investigated by academia or industry. Therefore, there is a gap in the literature on financing an MH. This study reviewed various methods for financing MHs and their corresponding loan terms, interest rates, down payments, and advantages or disadvantages. This study included Federal Housing Administration (FHA), chattel, and conventional loans. The aim was to identify the best approaches to reduce the cost of financing an MH that was based on specific conditions, such as the land ownership of the property and the type of foundation. Strategies, such as providing land lease communities for MHs to qualify them as real properties, were discussed. Recommendations were made to reduce ownership costs for manufactured houses to benefit the homeowners, MH industry, and mortgage companies.

Big is beautiful: The impact of bank–borrower relationship and sponsor size on credit spreads and underwriting fees in commercial real estate lending

This study uses a granular dataset to examine the impact of relationships between banks and borrowers and sponsor sizes on the credit spread and the associated underwriting fees of commercial real estate loans. This study focuses on commercial real estate banks that keep the loans on their books and do not use commercial mortgage-backed securities to transfer the credit risk to the capital market. Our findings reveal that credit spreads are lower for borrowers with a prior relationship with the bank; however, the impact of repeated lending varies across sponsor sizes. The prior relationship primarily reduces fees for small and medium-sized sponsors, whereas loans with large sponsors experience a stronger beneficial relationship effect in the credit spread.

Recourse as shadow equity: Evidence from commercial real estate loans

AbstractWe study the role that recourse plays in the commercial real estate loan contracts of the largest U.S. banks. We find that recourse is valued by lenders as a substitute for conventional equity. At origination, recourse loans have rate spreads that are about 20 basis points lower and loan‐to‐value ratios that are almost 3 percentage points higher than nonrecourse loans. Dynamically, recourse affects loan modification negotiations by providing additional bargaining power to the lender. Recourse loans were half as likely to receive accommodation during the COVID‐19 pandemic, and the modifications that did occur entailed a relatively smaller reduction in payments.

PROTECTING OF PROPERTY RIGHTS OF INTERNALLY DISPLACED PERSONS

The beginning of Russia’s armed aggression against Ukraine and its actual consequences in 2014-2015 forced hundreds of thousands of residents of the temporarily annexed and occupied territories to leave their place of residence. The need for proper provision and protection of their rights - taking into account the situation in which they found themselves - led to the introduction of the category “internally displaced person” into the system of Ukrainian legislation, which expresses the peculiarities of the position of these persons and their participation in legal relations, including in property`s relations. The development of this interdisciplinary legal sub-institute has an impact on the theoretical understanding of the forms of protection of property rights of individuals. The need for a thorough study of the changes brought by the amendments to the legislation and, especially, a full scale military invasion in 2022 determine the relevance of this article. The purpose of the article is to study the novelties of Ukrainian legislation on the protection of the property rights of internally displaced persons and their impact on the understanding of jurisdictional and non-jurisdictional forms, as well as ways of protecting the property rights of internally displaced persons. Based on the research materials, it was determined that the legislation proposed special measures to protect the property rights of IDPs (temporary free residence, acquisition of the right to a plot of land from state-owned lands, obtaining a real estate loan on preferential terms and others) can be considered as ways of protecting the property rights of IDPs in their relationship with each other and in connection with other rights of these persons. The development of the theory of forms and methods of protection of civil rights takes place mainly in special methods of protection of property rights (of jurisdictional form), which consist of: 1) in measures to protect movable property; 2) in the provision of benefits and compensations for IDPs in connection with the loss of the ability to use and dispose of their property; 3) in creating exceptions from legal regimes that take into account the specifics of the actual situation of IDPs; 4) in the provision of special powers of authorities aimed at protecting the property rights of IDPs.

Predicting economic growth: evidence from real-estate loans securitization

Predicting economic growth: evidence from real-estate loans securitization

The effect of state-level corruption on performance and risk of financial institutions

Purpose This study aims to investigate the effect of public corruption on the performance and risk of financial institutions domiciled in the USA.. Design/methodology/approach This study uses the US Department of Justice’s (DOJ) Public Integrity Section Reports to proxy corruption. The analysis is performed by bank size and includes robustness checks for omitted variables and endogeneity concerns. Findings The results show that a corrupt environment is associated with lower bank performance without a reduction in risk. Larger banks tend to underestimate the increase in credit risk. Small- and medium-size banks seek to “re-capture” returns in corrupt districts by reducing their liquidity. Research limitations/implications The implication of this research is that financial institutions do not thrive in corrupt environments and are unlikely to participate in corrupt practices. Overall, this study documents the tangible harm inflicted by corrupt practices. Practical implications A practical implication is that banks may attempt to re-capture lower returns resulting from corrupt environments by extending more risky loans, specifically, commercial real estate loans. Social implications This study demonstrates the costly impact of corruption on large and small banks. While larger banks report higher share of non-performing loans, smaller banks show an increase in the provision for loan and lease losses, suggesting that smaller banks may be more risk averse. Originality/value Prior studies investigate corruption in US firms while excluding financial institutions. This study fills this gap by investigating the effect of public corruption on the performance and risk of financial institutions domiciled in the USA.