Mortgage Supply Research Articles

The Theoretical Model of Polish Housing Policy between 2002 and 2016

Abstract Research background: This paper attempts to introduce the concept of Polish housing policy and define its course. Purpose: The main aim of the paper is to attribute the theoretical model of Polish housing policy and its goals and summarize the practical instruments and programs implemented between 2002 and 2016 to try to answer the question in what way the state was helping households to fulfil housing needs. Research methodology: The research method used in the paper was a query of Polish and foreign literature of housing policy models, goals and instruments in the theoretical part, in the practical part (main research) is the monograph analysis of Polish housing policy between 2002 and 2016 including: housing resource, housing supply and change of their structure in the examined timeline, availability of apartments, supply of mortgages and connections with the availability of apartments and macroeconomic situation measured by the yearly GDP per capita. Results: Theoretical and practical solutions were made. Polish housing policy can be defined as a wide ranging selective model according to Ghekiere (2009) division, the empirical analysis of the adopted solutions risks – marginalization of social housing and substantial impact of the financial sector (banking and mortgages) on housing which may be negative in the case of an economic crisis. Novelty: The value of this paper is a contribution to the debate on defining a theoretical model of housing policy and an explanation of the changes in housing in Poland from 2002–2016.

Employment in the Great Recession: How Important Were Household Credit Supply Shocks?

AbstractI pool data from all large multimarket lenders in the United States to estimate how many of the over 7 million jobs lost in the Great Recession can be explained by reductions in the supply of mortgage credit. I construct a mortgage credit supply instrument at the county level, the weighted average (by prerecession mortgage market shares) of liquidity‐driven lender shocks during the recession. The reduction in mortgage supply explains about 15% of the employment decline. The job losses are concentrated in construction and finance.

Macroeconomic implications of mortgage loan requirements: an agent-based approach

It is a well-known fact that the housing market, with its associated mortgage securities, plays a crucial role in modern economies. The recent crisis of 2007, triggered by the U.S. real estate bubble, confirms this key role and suggests the importance of regulating mortgage lending. This paper investigates these issues by designing a housing market with a linked mortgage lending instrument in the Eurace agent-based model. Our results show that the presence of a housing market in the model has relevant macroeconomic implications, driven mainly by the additional amount of endogenous money injected into the economy by new mortgages. This additional money generally helps to support and stabilize aggregated demand, thus improving the main economic indicators. However, if the regulation of mortgage lending is too lax, involving an increase in the debt-service-to-income ratio (DSTI), then the additional supply of mortgages no longer enhances macroeconomic performance, and the stability of the economic system is undermined. Based on a number of recent discussions, a regulation of stock control that targets households’ net wealth (a stock), rather than income (a flow) is designed and analyzed. The results show that regulation of stock control can be combined effectively with DSTI to increase the stability of the housing market and the economy as a whole. Interestingly, the regulation based on stock control also directly affects mortgage distribution among households, avoiding excessive concentration. From a policy perspective, our results suggest that the use of a mild flow control regulation, coupled with a stricter stock control measure, fosters sustainable growth and eases first-time buyers access to the housing market, encouraging homeownership.

Bank Concentration, Mortgage Lending and House Prices

This paper studies the link between banks' geographic concentration and the growth in mortgage lending during the boom and bust cycle. Concentrated banks increase their lending relatively less during the boom, and they experience lower reduction in their loans through the ensuing bust. In the aggregate, bank concentration has an impact on the overall credit supply rather than a mere reallocation of lending between concentrated and diversified banks: MSAs with greater exposure to concentrated banks experience less excessive expansion and contraction in mortgage supply during the boom and the following bust. As a result, higher bank concentration is associated with less severe boom and bust cycle in house prices.

Employment in the Great Recession: How Important Were Household Credit Supply Shocks?

I pool data from all large multimarket lenders in the U.S. to estimate how many of the over seven million jobs lost in the Great Recession can be explained by reductions in the supply of mortgage credit. I construct a mortgage credit supply instrument at the county level, the weighted average (by prerecession mortgage market shares) of liquidity-driven lender shocks during the recession. The reduction in mortgage supply explains about 15 percent of the employment decline. The job losses are concentrated in construction and finance.

Residential mortgages, the real estate market, and economic growth: evidence from Europe

PurposeThe purpose of this paper is to evaluate the impact of macroeconomic condition and real estate price trend on the amount of residential loan.Design/methodology/approachThe paper using a sample of 16 European Countries for the time period 2007–2015 evaluates the impact of change in the gross domestic product (GDP) growth and the inflation rate on the amount of residential loans. The analysis is performed by using a vector autoregressive (VAR) and generalized VAR approach for the full sample and for each country considered.FindingsFor a short-term horizon, shocks to mortgages, the house price index (HPI) and the GDP have a positive effect on the GDP, a shock to the amount of mortgages has a positive effect on the mortgage supply and a shock to the GDP has a negative effect on HPI. The main results for the long-term horizon are that a GDP shock has a positive and persistent effect on the amount of mortgages, a shock to HPI has a negative and persistent effect on mortgages and a shock to the amount of mortgages seems to have no persistent effect on the GDP or the HPI. Moreover, the analysis shows that a spillover risk among countries exists and a GDP shock in a European area has an effect on the GDP, real estate prices and residential mortgages in almost all European countries.Practical implicationsResults obtained show that both macroeconomic and housing prices shocks matter for the real estate lending and the effect are different in the short- and in the medium–long-term horizon. Results are also different country by country and they are affected by the level of financial development of the country.Originality/valueThe paper studies a lending crisis period and evaluates for the European market the impact of shock on macro-variables for mortgages focusing the attention for the first time only on residential mortgages.

Local Bank Competition, Credit Markets and House Prices.

This paper examines how a new lender affects local mortgage and housing markets around its branches. Specifically, I demonstrate the impact on mortgage supply, house prices and repossessions. I use the decision of the European Commission to force the UK’s largest retail bank to divest a part of its business as a shock that generates a new entrant but does not add any resources to the economy. The results show that incumbent banks increase mortgage lending in areas where the new bank has its branches which has a strong impact on real estate markets. House prices, average transaction numbers and mortgage repossession rates all increase in places that receive a branch of the new bank. The effect on prices occurs through the discount rate as rents are not affected.

Mortgage Supply and Housing Rents

We show that a contraction of mortgage supply after the Great Recession has increased housing rents. Our empirical strategy exploits heterogeneity in MSAs' exposure to regulatory shocks experienced by lenders over the 2010-2014 period. Tighter lending standards have increased demand for rental housing and have led to higher rents, depressed homeownership rates and an increase in rental supply. Absent the credit supply contraction, annual rent growth would have been 2.1 percentage points lower over 2010-2014 in MSAs where lending standards rose from their 2008 levels.

Mortgage Debt and Shadow Banks

Since the 1980s, the global banking sector has been characterized by three trends: i) a secular decline in interest rates, ii) a reallocation of bank investments from corporate loans towards mortgages and iii) the rise of shadow banking relative to regulated banking. This paper builds a general equilibrium framework that connects, analyzes and explains these trends in a causal way. In the model, exogenous downward pressure on real interest rates increases the share of mortgage investments. Consequently, the interbank market for mortgage securities becomes more liquid. This increases funding liquidity and shadow banks gain comparative advantage over regulated banks with respect to the supply of mortgage loans. In relative terms, the shadow banking sector grows. Meanwhile, the economy becomes more vulnerable to financial crises as shadow banks issue too many uninsured deposits. To enhance financial stability, I consider restrictions on admissible loan-to-value ratios for mortgage loans to reduce house price and mortgage supply fluctuation. Finally, I suggest to introduce interest-paying central bank deposits for households to raise the costs for banks to finance themselves with uninsured deposits.

Mortgage supply, LTV and risk pricing

This paper focuses on mortgage supply and its contribution to the loan-to-value (LTV)-ratio. The paper starts by finding the optimal LTV-ratio for a profit-maximising mortgagee that supply mortgages using housing as collateral. As the LTV-ratio represents the mortgagee's risk exposure, the optimal LTV-ratio is one where the mortgagee is paid for its actual risk exposure. Thinking in terms of social welfare, the profit-maximising LTV-ratio is also optimal for society in our supply side framework. When including additional characteristics from the supply side of the mortgage market, the paper shows how the profit-maximising LTV-ratio varies according to moral hazard, risk pricing, funding structures, lending volumes and collateral values. The supply side characteristics create a wedge between the profit-maximising LTV-ratio and the LTV-ratio optimal for society. The model helps understand the role of mortgage supply in the period preceding the financial crisis, where LTV-ratios increased considerably. Consequently, it also allows for straightforward arguments regarding macro-prudential policy. Highlighting risk exposure, the paper continues by analysing the risk pricing response to falling house prices and an LTV-ratio that exceeds the LTV-ratio at origination. The paper finds a kinked-relation between the mortgage rate and the LTV-ratio ex post, separating risk pricing ex ante and ex post.

Mortgage Supply, LTV and Risk Pricing

This paper derives the optimal LTV-ratio for a mortgagee that takes on deposits while it is supplying mortgages using housing as collateral. As the LTV-ratio represents the risk exposure of a mortgagee the optimal LTV-ratio varies according to moral hazard, funding, risk pricing, capital adequacy and lending volumes. Focusing on the supply side of mortgage markets the paper highlights the implications of collateral and the endogenous credit constraint for the LTV-ratio. In the wake of these implications, those on regulations follow naturally. The paper also shows how risk pricing responds to falling house prices and situations where the current LTV-ratio exceeds the LTV-ratio at origination. The relation between the interest rate margin and the LTV-ratio is kinked, distinguishing between risk pricing ex ante and ex post.

Has the Mortgage Pendulum Swung Too Far? Reviving Access to Mortgage Credit

In the wake of the financial crisis, mortgage lending to lower-income and minority borrowers overcorrected and has not recovered. While homeownership is a riskier investment than previously realized, still it remains a proven path to increased wealth on balance for lower-income households. There are a number of reasonable reforms that could achieve greater access to credit while containing default risk. These include strategies to reduce down payments safely and to keep monthly payments manageable, combined with fixed-rate loans. Pre-purchase counseling is important to preparing applicants for the financial demands of homeownership and strengthening their credit histories, while rapid foreclosure prevention counseling can reduce foreclosures dramatically for borrowers who miss payments. In addition, larger, structural changes to the lending industry, mortgage regulation, and housing finance are needed to remove artificial institutional barriers to the flow of responsible credit. In the short term, these include countercyclical rules to minimize credit bubbles and investor reforms to alleviate lenders’ liability concerns for inadvertent misrepresentations and minor underwriting errors affecting loans. In the longer term, mortgage finance could be re-envisioned to integrate housing counselors, real estate professionals, and economists into the mortgage supply chain to produce better borrowing decisions at favorable pricing. Closing the circle, ensuring an adequate supply of affordable rentals would give lower-income households the flexibility they need to make the right housing decisions for their personal circumstances at each stage of their lives.

Bank-Specific Shocks and House Price Growth in the U.S.

This paper investigates the link between mortgage supply shocks at the bank level and regional house price growth in the U.S. using micro-level data on mortgage markets from the Home Mortgage Disclosure Act for the 1990-2014 period. Our results suggest that bank-specific mortgage supply shocks indeed affect house price growth at the regional level. The larger the idiosyncratic shocks to newly issued mortgages, the stronger is house price growth. We show that the positive link between idiosyncratic mortgage shocks and regional house price growth is very robust and economically meaningful, however not very persistent since it fades out after two years.

Bank Deregulation and Personal Bankruptcy Filings

The removal of geographic restrictions on banking activities can provide credit to a larger population. Economic hardships, however, can force some of the borrowers to default on their loans and file for bankruptcy to overcome financial distress. Using data aggregated at the US county-level, we show that allowing an in-state bank to open branches anywhere within that state (intrastate branching) increases Chapter 13 filings (debt repayment from future income). An increase in mortgage supply after intrastate branching helps explain the rise in Chapter 13 filings, suggesting that homeowners file under Chapter 13 as an effort to save their houses. In contrast to the existing literature that is based on state-level data, the effect of interstate banking on Chapter 7 filings (debt repayment from asset liquidation) is insignificant.

Mortgage Supply and Housing Rents

We show that, especially since 2011, systemically important U.S. banks have increased their propensity to deny mortgage applications, particularly among FHA loan applicants and black and Hispanic borrowers. Tighter mortgage standards have increased demand for rental housing and led to higher rents, depressed homeownership rates, greater construction of multifamily housing, and lower rental vacancies. These effects are stronger in MSAs with barriers to using online lending platforms, such as age and internet accessibility, and where regulations inhibit competition among alternative lenders.

Mortgage Supply and the US Housing Boom: The Role of the Community Reinvestment Act

This paper studies the role of the Community Reinvestment Act (CRA) in the recent US housing boom-bust cycle. Using a difference-in-differences matching estimation, I find that the enhancement of CRA enforcement in 1998 caused a 7.7 percentage points increase in annual growth rate of mortgage lending by CRA-regulated banks to CRA-eligible census tracts relative to a group of similar-income CRA-ineligible census tracts within the same state. Financial institutions which are not subject to the CRA, however, do not show any change in their mortgage supply between these two types of census tracts after 1998. I take advantage of this exogenous shift in mortgage supply within an instrumental variable framework to identify the causal effect of mortgage supply on housing prices. I find that every 1 percentage point higher annual growth rate of mortgage supply leads to 0.3 percentage points higher annual growth rate of housing prices. Reduced form regressions show that CRA-eligible neighborhoods experienced higher house price growth during the boom and sharper decline during the bust period. I use placebo tests to confirm that this effect is in fact channeled through the shift in mortgage supply by CRA-regulated banks and not by unobserved demand factors. Furthermore, my results indicate that CRA-induced mortgages went to borrowers with lower FICO scores, carried higher interest rates, and encountered more frequent delinquencies.

The Causes of Fraud in the Financial Crisis of 2007 to 2009

The financial crisis of 2007 to 2009 was marked by widespread fraud in the mortgage securitization industry. Most of the largest mortgage originators and mortgage-backed securities issuers and underwriters have been implicated in regulatory settlements, and many have paid multibillion-dollar penalties. This article seeks to explain why this behavior became so pervasive. We evaluate predominant theories of white-collar crime, finding that theories emphasizing deregulation or technical opacity identify only necessary, not sufficient, conditions. Our argument focuses instead on changes in competitive conditions and firms’ positions within and across markets. As the supply of mortgages began to decline around 2003, mortgage originators lowered credit standards and engaged in predatory lending to shore up profits. In turn, vertically integrated mortgage-backed securities issuers and underwriters committed securities fraud to conceal this malfeasance and enhance the value of other financial products. Our results challenge several existing accounts of how widespread the fraud should have been and, given the systemic crimes that occurred, which financial institutions were the most likely to commit fraud. We consider the implications of our results for regulations that were based on some of these models. We also discuss the overlooked importance of illegal behavior for the sociology of markets.

How Does Bank Capital Affect the Supply of Mortgages? Evidence from a Randomized Experiment

We study the effect of bank capital on the supply of mortgages. We fully control for endogenous matching between borrowers, loan contracts, and banks by submitting randomized mortgage applications to the major online mortgage broker in Italy. We find that: higher bank capital is associated with a higher likelihood of application acceptance and lower offered interest rates; banks with lower capital reject applications by riskier borrowers and offer lower rates to safer ones. Finally, nonparametric estimates of the probability of acceptance and of the offered rate show that the effect of bank capital is stronger when capital is low.

Demand and Supply of Mortgage Credit

This paper estimates demand and supply of mortgage credit by using a hierarchical trend model. The empirical analysis is based on loan-level data covering the years 2005-2014 in the Netherlands. We find that high-income households take out higher loan amounts and have higher collateral values. Interest rates are negatively related to both loan amounts and collateral values. The common trend in the loan equation, a proxy for the changes in demand and supply of mortgage credit over time, suggests a large decline in mortgage demand and supply after 2007. The common trend in the collateral value equation is highly correlated with the common trend in the loan equation, suggesting a high pass-through rate of changes in credit conditions from loan to value. We also find that young household cohorts can afford to buy better quality houses in 2014 than in 2005, even if they could borrow less. On the contrary, older household cohorts take out higher loans in 2014 than in 2005, but their collateral values do not change. We argue that younger households took up less mortgage debt as they became more credit constraint over time. Older households on the other hand suffered from negative home equity, forcing them to take up higher mortgage loans.

Higher Bank Capital Requirements and Mortgage Pricing: Evidence from the Counter-Cyclical Capital Buffer

How has the CCB affected mortgage pricing after Switzerland became the first country to activate this Basel III macroprudential tool? By analyzing a database with several offers per mortgage request, we construct a picture of mortgage supply and demand. We find, first, that the CCB changes the composition of mortgage supply, as relatively capital-constrained and mortgage-specialized banks raise prices more than their competitors do. Second, risk-weighting schemes linked to borrower risk do not amplify the CCB's effect. To conclude, changes in the supply composition suggest that the CCB has achieved its intended effect in shifting mortgages from less resilient to more resilient banks, but stricter capital requirements do not appear to have discouraged less resilient banks from risky mortgage lending.