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« Back to Results

GSE

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Washington C
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Wayne Passmore, Federal Reserve Board

Did Investors Price Regional Housing Bubbles? A Tale of Two Markets

Tian Luan
,
George Washington University

Abstract

The recent experience of a massive cycle in mortgage defaults was associated with a matching fluctuation in housing prices. Both events were very unequally distributed across local housing markets. This paper tests the hypothesis that spatial variation in the jumbo/conforming spread indicates investor perception of spatial differences in credit risk at any given time. The jumbo/conforming spread reflects spatial variation in credit risk perceptions in the jumbo market because conforming mortgage rates vary over time but not spatially. If investors in the jumbo market priced spatial differences in credit risk then spatial variation in the jumbo/conforming spread should predict spatial variation in the future change in house prices. The empirical tests, performed here for the first time, show the results are both economically and statistically signif- icant. Specifically, a one standard deviation increase in the jumbo/conforming spread is associated with 0.87%- 1.27% lower housing price appreciation at the state level and 0.52%-1.37% lower appreciation at the MSA level. Overall, it appears that investors in the jumbo market were aware of spatial differences in the size of housing market bubbles and priced credit risk differences across housing markets, especially in large MSAs. Furthermore, failure of conforming rates to reflect these expectations likely accentuated the size of the largest local bubbles.

Eyes Wide Shut? Mortgage Insurance During the Housing Boom

Neil Bhutta
,
Federal Reserve Board
Benjamin J. Keys
,
University of Pennsylvania

Abstract

In the U.S., private mortgage insurance (PMI) is mandated for high-leverage mortgages purchased by Fannie Mae and Freddie Mac, to help serve as a private market check on GSE risk-taking. However, we document that PMI companies - contradicting the industry’s own research regarding housing risk - expanded dramatically into high-risk contracts at the tail-end of the housing boom. We examine patterns of PMI application denial rates, default rates on PMI-backed loans, and growth rates of high-leverage lending, around the GSE conforming loan limit, along with information extracted from company, industry and regulatory filings and reports, to argue that PMI behavior during the housing boom reflects a moral hazard problem inherent to insurance companies. Our results suggest that rather than acting as a check on risky behavior, private mortgage insurers exacerbated the moral hazard problem of the GSEs.

Changing the Footprint of GSE Loan Guarantees: Estimating Effects on Mortgage Pricing and Availability

Thomas Conkling
,
U.S. Consumer Financial Protection Bureau
Alexei Alexandrov
,
Amazon
Sergei Koulayev
,
U.S. Consumer Financial Protection Bureau

Abstract

We estimate the effects of marginal changes to the loan limits above which Fannie Mae and Freddie Mac (GSEs) are unable to guarantee and securitize loans and to the fees that the GSEs charge for guaranteeing mortgage loans (g-fees). Using a dataset of daily rate sheets by dozens of large mortgage lenders, we show that the average price difference across the loan limit is on the order of 5 basis points, though it masks considerable variation across lenders and loan characteristics. We show that changes in g-fees are close to fully passed-through to consumers; however, they are also dwarfed by existing price dispersion across lenders. We estimate the responsiveness of consumer demand to changes in interest rates of this magnitude. Finally, using our estimates above, we evaluate the effects of hypothetical marginal changes in both g-fees and loan limits.

Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection

Min Hwang
,
George Washington University
Chen Miller
,
Bank of America
Robert Van Order
,
George Washington University

Abstract

This paper examines the impacts of changes in the Federal Housing Administration (FHA) insured loan limit in response to the Economic Stimulus Act (ESA) of 2008. We examine the number of transactions and average loan-to-value ratios for loans originated in high-cost areas and low-cost areas, before and after the ESA policy change. We find that the increase in loan limits does result in larger demand for FHA loans with higher LTV. However, the additional demand for loans was less likely to be driven by larger demand for housing purchase. We find evidence of increased adverse selection in the sense that increased loan limits induced riskier borrowers, and that much of the increased demand for FHA loans came at the expense of other loans. In particular, newly qualified borrowers, especially via cash-out refinance loans, are more likely to take advantage of increased loan limit policy. A further analysis indicates that the newly qualified loans had higher default rates and higher loss given default rate.
Discussant(s)
Shane Sherlund
,
Federal Reserve Board
Larry Cordell
,
Federal Reserve Bank of Philadelphia
W. Scott Frame
,
Federal Reserve Bank of Atlanta
Joe Tracy
,
Federal Reserve Bank of New York
JEL Classifications
  • G2 - Financial Institutions and Services
  • L1 - Market Structure, Firm Strategy, and Market Performance