This paper presents an analysis of mortgage delinquency between 2004 and 2008 using a loan-level data set from a major national mortgage bank. Our analysis highlights two problems underlying the ...mortgage crisis: a reliance on mortgage brokers who tend to originate lowerquality loans and a prevalence of low-documentation loans—known in the industry as "liar's loans"—that result in borrower information falsification. While over three-quarters of the difference in delinquency rates between bank and broker channels can be attributed to observable loan and borrower characteristics, the delinquency difference between full-and low-documentation mortgages is due to unobservable heterogeneity, about half of it potentially due to income falsification.
I empirically analyze credit market outcomes when competing lenders are differentially informed about the expected return from making a loan. I study the residential mortgage market, where property ...developers often cooperate with vertically integrated mortgage lenders to offer financing to buyers of new homes. I show that these integrated lenders have superior information about the construction quality of individual homes and exploit this information to lend against higher quality collateral, decreasing foreclosures by up to 40%. To compensate for this adverse selection on collateral quality, nonintegrated lenders charge higher interest rates when competing against a better-informed integrated lender.
What "Triggers" Mortgage Default? Elul, Ronel; Souleles, Nicholas S.; Chomsisengphet, Souphala ...
The American economic review,
05/2010, Volume:
100, Issue:
2
Journal Article
Peer reviewed
Open access
This paper assesses the relative importance of two factors for mortgage default: negative equity and illiquidity. Both negative equity and illiquidity, as measured by high credit card utilization, ...are significantly associated with mortgage default., with comparably sized marginal effects. Moreover, the two factors interact with each other: the effect of utilization generally increases with combined loan-to-value ratio (CLTV), though it is significant even for low CLTV. County level unemployment shocks are also associated with higher default risk (though less so with high utilization) and strongly interact with CLTV. In addition, having a second mortgage implies significantly higher default risk, particularly for borrowers who have first-mortgage loan-to-value ratio approaching 100%.
Numerical ability predicts mortgage default Gerardi, Kristopher; Goette, Lorenz; Meier, Stephan
Proceedings of the National Academy of Sciences - PNAS,
07/2013, Volume:
110, Issue:
28
Journal Article
Peer reviewed
Open access
Unprecedented levels of US subprime mortgage defaults precipitated a severe global financial crisis in late 2008, plunging much of the industrialized world into a deep recession. However, the ...fundamental reasons for why US mortgages defaulted at such spectacular rates remain largely unknown. This paper presents empirical evidence showing that the ability to perform basic mathematical calculations is negatively associated with the propensity to default on one’s mortgage. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out loans in 2006 and 2007, and match them to objective, detailed administrative data on mortgage characteristics and payment histories. The relationship between numerical ability and mortgage default is robust to controlling for a broad set of sociodemographic variables, and is not driven by other aspects of cognitive ability. We find no support for the hypothesis that numerical ability impacts mortgage outcomes through the choice of the mortgage contract. Rather, our results suggest that individuals with limited numerical ability default on their mortgage due to behavior unrelated to the initial choice of their mortgage.
Household leveraging and deleveraging Justiniano, Alejandro; Primiceri, Giorgio E.; Tambalotti, Andrea
Review of economic dynamics,
January 2015, 2015-01-00, 20150101, Volume:
18, Issue:
1
Journal Article
Peer reviewed
Open access
U.S. households' debt skyrocketed between 2000 and 2007, and has been falling since. This leveraging (and deleveraging) cycle cannot be accounted for by the relaxation, and subsequent tightening, of ...collateral requirements in mortgage markets observed during the same period. We base this conclusion on a quantitative dynamic general equilibrium model calibrated using macroeconomic aggregates and microeconomic data from the Survey of Consumer Finances. From the perspective of the model, the credit cycle is more likely due to factors that impacted house prices more directly, thus affecting the availability of credit through a change in collateral values. In either case, the macroeconomic consequences of leveraging and deleveraging are relatively minor, because the responses of borrowers and lenders roughly wash out in the aggregate. These results suggest that household debt overhang alone cannot account for the slow recovery from the Great Recession.
The recent financial crisis, with its origins in the collapse of the sub-prime mortgage boom and house price bubble in the USA, is a shown to have been a striking example of 'glocalisation', with ...distinctly locally varying origins and global consequences and feedbacks. The shift from a 'locally originate and locally-hold' model of mortgage provision to a securitised 'locally originate and globally distribute' model meant that when local subprime mortgage markets collapsed in the USA, the repercussions were felt globally. At the same time, the global credit crunch and the deep recession the global financial crisis precipitated have had locally varying impacts and consequences. Not only does a geographical perspective throw important light on the nature and dynamics of the recent financial meltdown, the latter in turn should give impetus for a more general research effort into the economic geography of bubbles and crashes.
This paper establishes a basic framework to study three different variants of Participating Mortgages (PMs). We obtain results for Shared Appreciation Mortgages (SAMs), Shared Income Mortgages (SIMs) ...and Shared Equity Mortgages (SEMs) in closed-form. We illustrate our findings with examples that show PMs are also attractive in an environment where prepayment can occur. Finally we conclude with the public policy implications of employing PMs as workout loans, especially post sub-prime crisis. We argue that by facilitating better risk sharing, PMs offer a means to enhance the efficiency and resiliency of the financial system.
The Rescue of Fannie Mae and Freddie Mac Frame, W. Scott; Fuster, Andreas; Tracy, Joseph ...
The Journal of economic perspectives,
04/2015, Volume:
29, Issue:
2
Journal Article
Peer reviewed
Open access
The imposition of federal conservatorships on September 6, 2008, at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation—commonly known as Fannie Mae and Freddie ...Mac—was one of the most dramatic events of the financial crisis. These two government-sponsored enterprises play a central role in the US housing finance system, and at the start of their conservatorships held or guaranteed about $5.2 trillion of home mortgage debt. The two firms were often cited as shining examples of public-private partnerships—that is, the harnessing of private capital to advance the social goal of expanding homeownership. But in reality, the hybrid structures of Fannie Mae and Freddie Mac were destined to fail at some point, owing to their singular exposure to residential real estate and moral hazard incentives emanating from the implicit guarantee of their liabilities. We describe the financial distress experienced by the two firms, the events that led the federal government to take dramatic action in an effort to stabilize housing and financial markets, and the various resolution options available to US policymakers at the time; and we evaluate the success of the choice of conservatorship in terms of its effects on financial markets and financial stability, on mortgage supply, and on the financial position of the two firms themselves. Conservatorship achieved its key short-run goals of stabilizing mortgage markets and promoting financial stability during a period of extreme stress. However, conservatorship was intended to be a temporary fix, not a long-term solution, and more than six years later, Fannie Mae and Freddie Mac still remain in conservatorship.
•Reverse mortgages let elderly homeowners consume home equity without leaving the home.•Demand is low compared to predictions.•We assess reverse mortgage knowledge among U.S. homeowners and its ...relation to demand.•Awareness of reverse mortgages is high, but knowledge of contract terms is limited.•Low knowledge and misunderstanding of the product relate to low demand.
Reverse mortgages allow elderly homeowners to unlock and consume home equity without leaving their homes. Relative to the number of elderly homeowners with limited financial resources, the take-up rates of reverse mortgages are low. To understand the low take-up rates we first survey U.S. homeowners aged 58 and older assessing their knowledge (literacy) about the most popular reverse mortgage product, the Home Equity Conversion Mortgage (HECM). Next, we study the relationship between knowledge and the intention to use a HECM. Awareness of reverse mortgages is high, but knowledge of contract terms is limited. More knowledgeable homeowners and those with peers who have a reverse mortgage express greater intention to use such a product. Respondents who would benefit most from reverse mortgages (those with low incomes and limited savings) express greater intention to use reverse mortgages, but lack knowledge of the contract terms. Our findings suggest that take-up rates might be increased through improving knowledge about contract terms or changing the product’s design to make it easier to understand in the first place.
Using several large data sets of mortgage loans originated between 2004 and 2007, we find that in the prime mortgage market, banks generally sold low-default-risk loans into the secondary market ...while retaining higher-default-risk loans in their portfolios. In contrast, these lenders retained loans with lower prepayment risk relative to loans they sold. Securitization strategy of lenders changed dramatically in 2007 as the crisis set in with most unwilling to retain higher-default-risk loans in return for lower prepayment risk. Contrary to the prime market, the subprime market does not exhibit any clear pattern of adverse selection.
PDF
