Residential Mortgage Loans Research Articles

Malaysian residential mortgage loan default: a micro-level analysis

PurposeThis study investigates factors contributing to residential mortgage loans default by utilizing a unique dataset of borrowers' default data from one of the pioneer lending institutions in Malaysia that provides home financing to the public. Studies on mortgage loan default have been extensively examined, but limited studies utilize the individual borrower's data, as financial institutions generally hesitant to reveal their customers' data due to confidentiality issue.Design/methodology/approachThis study uses logistic regression model to analyze 47,158 housing loan borrowers' data for the year 2016.FindingsThe findings suggest that male borrowers, Malay and other type of ethnicity, guarantor availability, loan original balance, loan tenure, loan interest rate and loan-to-value (LTV) ratio are the significant factors that influence mortgage loans default in Malaysia.Research limitations/implicationsFuture studies may expand the sample by employing data from other types of financial institutions that would give greater insights as findings might vary due to differences in objectives, functions and regulations. In addition, the findings are subjected to the censoring bias where future studies could perform the survival analysis to control for censoring bias and re-validating the findings of the present study.Practical implicationsThe findings provide valuable insights for lending institutions and the government to formulate housing loan policy in Malaysia.Originality/valueTo the best of the authors' knowledge, this is the first study in the context of emerging economies that uses financial institution's internal data to investigate factors of mortgage loan default.

Representation and Warranty Enforcement: Using Blockchain Technology to Improve the Investor Experience

Wilmington Trust is proposing to utilize blockchain technology to enhance the process of enforcing the implementation of representations and warranties (R&Ws). In the past, the R&W enforcement process has taken months, if not years, to get to a proposed solution, and even then, there has been much difficulty in getting to an agreement on how best to enforce R&Ws. The blockchain technology will enhance the speed and accuracy of the process, thus solving a problem that has vexed the investor community that buys mortgage products. By utilizing blockchain technology, Wilmington Trust proposes to do the following: 1. Centralize all documentation in one system, including the documents related to R&Ws at time of origination, at time of servicing, and for the life of the servicing, as well as the supporting documents needed to make a decision. 2. Speed up identification of issues related to non-compliance with R&Ws. 3. Arrive at decision resolutions in days instead of the current months/years-long process that is often accompanied by disagreements, disputes, and lawsuits. TOPICS:Legal and regulatory issues for structured finance, MBS and residential mortgage loans Key Findings • Enforcement of R&Ws has been a huge, time-consuming, costly, acrimonious, and investor-unfriendly process. • Wilmington Trust proposes to utilize blockchain technology to centralize the process, improve the time frames dramatically, and remove the issues listed above. • Investors have expressed strong interest, hoping to remove impediments to a more efficient, fair, and balanced process that ensures adherence to the R&Ws of both origination and servicing of loans they purchase.

Pattern Risk of the Securitized Biopharmaceutical Mega-Fund

Clinical-stage biopharmaceutical companies are constantly challenged to raise sufficient capital to advance the development of the drug projects in their pipelines. The risk of capital becoming too costly or unavailable when it is needed can constrain the development and commercialization of important medical advances. Securitization has been discussed as a way to increase the flow of capital to clinical-stage biopharmaceutical companies. For securitization to draw more capital into funding biopharmaceutical development, a technique for allocating the current and future cash flows associated with specific biopharmaceutical products must be developed. Fernandez et al. (2012), Fagnan et al. (2013), and Fagnan et al. (2014) have proposed a “mega-fund” scheme as the foundation for a clinical stage biopharmaceutical securitization structure. The securities issued to finance the “mega-fund” are called “Research Backed Obligations.” In this article, the authors modify their label by calling the securities structured biopharmaceutical-backed bonds (SBBBs). This model of the flows of cash through the SBBBs illustrates that it is not only the final number of projects that succeed that drives the value of the fund; also important are the timing of failure, the probability of failing in each phase of development, and the magnitude of success in each phase. TOPICS:Legal and regulatory issues for structured finance, MBS and residential mortgage loans Key Findings • The pattern of drug development failure across the three phases of FDA clinical trials drives the portfolio value of the Biopharmaceutical Mega Fund. • Incorporating licensing/royalty agreements between clinical stage biopharmaceutical companies that are developing the drugs that compose the biopharmaceutical mega-fund and commercial stage biopharmaceutical companies into the securitization program will alleviate adverse selection issues that could depress the value of the securities issued by the mega-fund. • Pattern risk is the uncertain path of progress through the clinical stages of testing that the assets in the biopharmaceutical mega-fund follow. This risk can be managed by engineering the structured biopharmaceutical-backed bonds to account for variations in the patterns of clinical failure.

Foreclosures and Their Costs: Could They Have Been Avoided? The Case of California during the Mortgage Crisis

The author analyzes a loan-level dataset of 1,528 defaults in California that led to sale of the property as “Real Estate Owned” during the period 2005 to 2017. In 898 cases (59%), lenders lost 43% of the initial loan ($89,877) on average per foreclosure. In 942 cases (62%), borrowers lost 30% of the initial price of their home ($147,077) on average. The borrowers who ended up with a profit were those who increased their debt the most after the first purchase loan. Moreover, one in four borrowers generated an average profit of $115,856, while their lenders incurred an average loss of $93,114 precisely because excessive equity extraction transfered the downside risk to the lender. Two-thirds of all ARM borrowers defaulted within the first 3 years of the loan, implying underqualified borrowers at origination. This is an indication of predatory lending/borrowing practices that fueled the wave of foreclosures. The author finds that foreclosure discounts on REO sales in California were on average 35%, with the highest discount appearing in 2009. Measures that prevent or limit cash-outs during a housing boom, and incentives to default during a housing bust, could help reduce foreclosures and their costs. TOPICS:MBS and residential mortgage loans, legal and regulatory issues for structured finance, financial crises and financial market history Key Findings • An analysis of 1,528 foreclosures in California shows that lenders lost $89,877 and borrowers lost $147,027 on average per foreclosure during the 2008 mortgage crisis. One in four defaulting borrowers generated a profit while their lenders incurred a loss due to excessive equity extraction. • ARM borrowers defaulted within the first 3 years of the loan, indicating that these borrowers were underqualified at origination. FRM borrowers defaulted later but used cash-outs more aggressively, leading to negative equity that motivated defaults during the crisis. • Foreclosure discounts were on average 35% in California, with the worst discount occurring in 2009. Despite the volatility of HPI, every period of 12 years or longer since 1975, led to price appreciation, indicating that foreclosure should be avoided, as the recovery of the market always leads to capital gains.

Residential Mortgage Loans Delinquencies Analysis and Risk Drivers Assessment

Residential mortgage loans play an important role in improving living conditions in developed countries. In Latvia, however, residential mortgage volumes have declined throughout the post-crisis year’s and were at the end of 2018 12% below the end 2008 level, while the house price index ca. 25% below pre-crisis level. The main reasons for this are banks credit losses, which resulted in a revision of credit granting standards and a deteriorating in their availability. On the other hand, households have experienced increased uncertainty, both as a result of financial difficulties, experienced during the crisis years and political instability in the post-crisis years. It is therefore essential to identify the true risk drivers and to analyse them. Based on existing researches in other countries, the author has identified several dozen macro-economic indicators, such as the unemployment rate, wage growth, housing price index, etc. and micro factors such as the age of the borrower, total debt to income, loan-to-value, etc., have developed univariate and multivariate econometric models and have examined their statistical stability. Consequently, through a consistent application, it is possible to take sound credit decisions, both in banks and by households, and to contribute to the sustainable development of the housing market.

Rank-Based Error Tracking for Agency MBS Prepayment Models

Mode testing, also called error tracking, is a key requirement for collateral behavior forecasting models in securitized product, including models of prepayment, default, response, utilization, etc. The high dimensionality and statistical noise associated with agency mortgage-backed securities prepayment behavior make error tracking a complex task. The traditional method focuses on single dimension, for example, along vintage coupon, and does not provide a clear measure of model accuracy and effectiveness. The new method, a rank-based error-tracking methodology, provides an efficient and comprehensive approach to measure model performance. It provides a clear definition of accuracy-which allows clear measure to compare among models. This is superior to the existing one-dimensional method, and other supplement methods (e.g., lift curve method for loans). We discuss these issues as well as applicable statistical theory, and potential applications. <b>TOPICS:</b>MBS and residential mortgage loans, factor-based models <b>Key Findings</b> • The proposed ranked-based error tracking provides a comprehensive and consistent measure for model performance across macroeconomic environment and across pool/loan attributes, superior to the prevailing one-dimensional error-tracking methodology. • Two key measures are the steepness and accuracy of the ranking curve. The steepness measures quantify the model’s ability differentiating across macro and pool variables. The accuracy measures quantify the model’s ability forecasting the prepayment intensity. • The rank-based methodology can be applied to any selected sample pool universe and performance periods. It can be systematically used for model review and model comparison.

The Mortgage Meltdown and the Failure of Investor Protection

The aftermath of the US mortgage meltdown of the late 2000s revealed the biggest failure of investor protection since the Great Depression: the securities laws did not allow investors in non-agency mortgage-backed securities (MBS) to recover losses on the securities even though there had been material misstatements and omissions when the securities were sold. The key issue was the short time limit for starting a lawsuit under those laws. Many investors did not become aware of the nature of their claims until after the time limit had expired. A lot of investors pursued alternative legal theories, such as contract claims, but short time limits were also an issue there. The mortgage meltdown produced losses on the order of $1 trillion (±20%), most of which were borne by non-agency MBS investors. The underlying cause of those losses was an industry-wide breakdown of mortgage lending and securitization practices from around 2005 through 2007. The nature of that breakdown was not fully revealed until many years later through investigations by the US Department of Justice, which revealed the nature and extent of the problems in a series of major settlements starting in 2013. <b>TOPICS:</b>MBS and residential mortgage loans, financial crises and financial market history, CMBS and commercial mortgage loans <b>Key Findings</b> • The mortgage meltdown produced $1 trillion (±20%) of losses from 2007 through 2016. The losses were borne primarily by investors in non-agency mortgage-backed securities (MBS). • The cause of the mortgage meltdown was an industry-wide breakdown of loan origination and securitization practices. The breakdown of practices was not disclosed to non-agency MBS investors when they made their investments. • Laws intended to protect investors from misstatements or omissions in the sale of securities did not work effectively. The maximum time limit for starting lawsuits to recover losses was very short. In most cases, the time limit expired before investors even learned the relevant facts about how they had been misled.

Demand for residential mortgage loans and house prices in the euro area

Demand for residential mortgage loans and house prices in the euro area

Does change in the market structure have any impact on different types of bank loans in the EU?

The aim of this paper is to investigate the issue of asymmetry of credit market determinants of bank loans (corporate, consumer, and residential mortgage loans) between the CEE-11 countries (Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia, Romania) and other EU countries (Austria, Belgium, Denmark, Finland, France, Greece, Italy, Spain, the Netherlands, Ireland, Luxembourg, Germany, Portugal, Sweden, United Kingdom, Malta, and Cyprus) after the global financial crisis (GFC) of 2007–09 in the context of market structure and foreign bank presence. Using the dynamic panel model, this study finds differences in the determinants of growth in loans for two groups of countries after the global financial crisis. Furthermore, a panel data analysis of CEE-11 countries against other EU countries also finds differences between determinants of different types of bank loans. The influence of foreign capital and concentration on credit growth is different depending on the type of loans. Finally, this paper complement the evidence for support for sectoral and country specific approach in a macroprudential policy tools.

Assessment of insolvency issues for the mortgage originator and trustee-issuer in securitisation programs

In a typical mortgage securitisation program in Australia, an originating bank or independent mortgage provider ('IMP')' with a substantial pool of residential mortgage loans, sells or transfers a portfolio of its mortgages to a special purpose vehicle ('SPV'). This SPV is a trust, established separately from the originating bank or IMP. The transfer is intended to separate the mortgages from risks associated with the originator. For this reason, the originating bank must structure the transfer so that it constitutes a 'true sale', that is sufficient under insolvency law to remove the mortgages from the originating bank's asset pool.

Labor Mobility and Loan Origination

This paper examines the effect of loan officers’ labor mobility on loan origination. Relying on a spatial regression discontinuity design, we show that mortgage loans originated after the adoption of the inevitable disclosure doctrine (IDD) – a mechanism discouraging labor mobility – have a lower default probability, a higher loan modification rate, and a lower foreclosure rate. These effects are unaccompanied by any reduction in loan supply and contribute to more stable housing prices. Using the adoption of the Uniform Trade Secrets Act as an alternative identification generates consistent results. Overall, our findings suggest that restricting loan officers’ labor mobility leads to better ex ante screening and ex post monitoring, improving the origination efficiency for U.S. residential mortgage loans.

Mortgage Modifications for Government Loans: New Tools Needed for a Higher Rate Environment

The Great Recession taught us that loan modifications are often more advantageous to both investors and borrowers than foreclosures. However, government loan modifications are less effective than their conventional counterparts, as the toolkit is very limited. The first step in a government modification is to change the mortgage rate to the current market rate to allow for re-securitization, thus raising the borrower’s rate in a rising rate environment. This offsets monthly payment reduction from the FHA’s partial claim or the USDA’s equivalent and results in a less sustainable modification. In this article, we propose prospectively changing Ginnie Mae pooling requirements to permit in-pool modification with a recast to retain the original note rate; the cost to investors would be very small. If, in addition, the Veteran’s Administration (VA) could offer partial claim or forbearance, it would allow VA borrowers to be on a more equal footing with FHA or USDA borrowers. TOPICS:MBS and residential mortgage loans, financial crises and financial market history, risk management

Low Mortgage Rates and Securitization: A Distinct Perspective on the US Housing Boom*

AbstractIn this paper, we analyse the impacts of low interest rates and lax underwriting standards on the US housing boom around the beginning of the new millennium. We suggest a time‐varying mean of the log price‐to‐rent ratio (PtR) to capture the persistent changes in housing prices. We show that the increasing latent trend in the PtR was significantly affected by the increased securitization of residential mortgage loans and decreasing interest rates, with the former effect being about three times larger than the latter. In the absence of securitization, negative interest rates would have been needed to reproduce an equally large housing boom since 2003.

LTV policy as a macroprudential tool and its effects on residential mortgage loans

Abstract Since the early 2000s, macroprudential policy has increasingly become part of the regulatory and supervisory framework. Likewise, the housing market has been at the center of the debate on systemic financial risk prevention. Among macroprudential tools, the purpose of the loan-to-value (LTV) ratio is to constrain mortgage loan creation. This paper is unique in that it analyzes the effectiveness of LTV on mortgage lending moderation using a large sample of more than 4000 banks from 46 countries. The analysis suggests mortgage loans have been successfully curbed in countries with a LTV policy. Size and non-performing loans are the two key characteristics to the effectiveness of LTV. When nonlinearities are considered, the average effect of LTV can be very large; however, it becomes much less effective with large banks and banks with bad loans. Our results suggest the inclusion of other macroprudential tools may have complementary effects to LTV, and for large size banks in particular.

Investment Performance of Credit Risk Transfer Securities (CRTs): The Early Evidence

Credit risk transfer (CRT) securities were introduced by Fannie Mae and Freddie Mac in 2013. As of the end of 2017, in combination, the two government sponsored housing enterprises had issued a total of $53 billion in CRTs linked to residential mortgage loans with a total face value of $1.79 trillion. The goal is to shift mortgage risk from tax payers to the private sector. In return, investors expect to be compensated. The authors document the returns earned by investors in the various CRT tranches since their inception. The most senior tranches have provided an average representative return of 0.26% per month. The most junior tranches have provided an average representative return of 1.71% per month. These compare with average monthly returns of 0.03%, 0.15%, and 0.87% to T-bills, 15-year agency mortgage-backed securities, and 10-year high-yield corporate bonds, respectively, over the same time periods.

Investment Performance of Credit Risk Transfer Securities (CRTs): The Early Evidence

Credit Risk Transfer (CRT) securities were introduced by Fannie Mae and Freddie Mac in 2013. As of the end of 2017, in combination, the two Government Sponsored housing Enterprises (GSEs) had issued a total of $53 billion in CRTs linked to residential mortgage loans with a total face value of $1.79 trillion. The goal is to shift mortgage risk from tax payers to the private sector. In return, investors expect to be compensated. We document the returns earned by investors in the various CRT tranches since their inception. The most senior tranches have provided an average representative return of 0.26% per month. The most junior tranches have provided an average representative return of 1.71% per month. These compare with average monthly returns of 0.03%, 0.15%, and 0.87% to T-bills, 15-year agency MBS, and 10-year high-yield corporate bonds, respectively, over the same time periods.

Predicting loss severities for residential mortgage loans: A three-step selection approach

This paper develops a novel framework to model the loss given default (LGD) of residential mortgage loans which is the dominant consumer loan category for many commercial banks. LGDs in mortgage lending are subject to two selection processes: default and cure, where the collateral value exceeds the outstanding loan amount. We propose a three-step selection approach with a joint probability framework for default, cure (i.e., zero-LGD) and non-zero loss severity information. The proposed methodology demonstrates improved performance in out-of-time predictions compared to widely used OLS regressions.

A Housing Price Dynamics Model Using Heterogeneous Interacting Agents

The regulatory restraints on residential mortgage loans have a major impact on the housing market dynamics. Limits on the loan-to-value and debt-to-income ratio can be used to control credit availability, changing how agents behave and, therefore, how housing market price evolves. In this work, we propose a pricing model based on the heterogeneous agents theory, in which owners are influenced by historical housing demand, whereas buyers' behavior depends on credit availability, i.e., on regulatory restraints on residential mortgage loans. We show that the market price can be described by a Markov process that converges to a deterministic dynamical system as the number of agents increases. We establish the conditions under which the emerging system has a nontrivial equilibrium price, which depends on the regulatory restraints on mortgage loans, on buyers' reserve price, and on owners' memory and sensitivity to changes in the housing demand. Finally, we also show that changes in owners' memory and sensitivity to housing demand can lead to price oscillations or a Neimark--Sacker bifurcation, which are typically observed in bubble formation processes.

Determinants of Distress in the UK Owner-Occupier and Buy-to-Let Mortgage Markets

The mortgage market has played a central role in the global financial crisis. One particularly pressing question surrounds the conditions under which mortgage borrowers enter distress, ie get into arrears or default. This paper develops a novel micro dataset from residential mortgage loans which UK banks and building societies have pre-positioned with the Bank of England for use as collateral in exchange for central bank funding. The dataset is used to investigate the determinants of borrower distress as a function of borrower and loan-level stock/flow characteristics over the loans’ lifetime in the buy-to-let (BTL) and owner-occupier (OO) mortgage markets. We find systematic differences between these two markets, controlling for a range of loan and borrower characteristics as well as macro variables. Our main result shows that, adjusting for affordability, the loan-to-value ratio is reliably more important for borrower distress in the OO market than for distress in the BTL market, contradicting McCann’s (2014) results.

Current status and issues of existing residential mortgage and renovation loan

Current status and issues of existing residential mortgage and renovation loan