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Default and Foreclosure

Paper Session

Friday, Jan. 4, 2019 12:30 PM - 2:15 PM

Hilton Atlanta, 301-302
Hosted By: American Real Estate and Urban Economics Association & American Economic Association
  • Chair: Vincent Yao, Georgia State University

Private Mortgage Securitization and Loan Origination Quality - New Evidence from Loan Losses

Abdullah Yavas
,
University of Wisconsin-Madison
Shuang Zhu
,
Kansas State University

Abstract

Due to data constraints, earlier studies of the impact of securitization on loan quality have used default probability as a proxy for loan quality. In this paper, we utilize a unique data set that allows us to use loan losses, which incorporate both probability of default and loss given default, to proxy for mortgage quality. Our analysis of prime loans shows that higher expected loan losses are associated with higher probability of securitization. Lenders sell prime loans with lower observable quality and keep higher observable quality loans on their books. For subprime loans, we observe opposite results that lenders sell better quality loans and keep lower quality loans on their book. We then use the cutoff FICO score of 620 to infer the lender’s screening effort with respect to unobservable loan quality. We find that securitized prime loans exhibit no significant difference in default losses for 620- versus 620+ loans. However, securitized subprime loans with a 620- score incur significantly lower loan losses than securitized subprime loans with a 620+ score. By using loan losses as the proxy of loan quality, separating the analysis into prime and subprime samples, and distinguishing between observable and unobservable risk characteristics, this study sheds additional light on the potential channels that the securitization affects loan quality.

A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession

Chandler Lutz
,
University of California-Los Angeles
Stuart Gabriel
,
University of California-Los Angeles
Matteo Iacoviello
,
Federal Reserve Board

Abstract

"We investigate the causal housing impacts of the 2000s crisis-period California Foreclosure Prevention Laws (CFPLs), policies that encouraged mortgage modifications by substantially increasing the lender pecuniary and time costs of foreclosure. The CFPLs prevented 248,000 California foreclosures (a reduction of 20.9%), increased California aggregate house prices by 6.2%, and created $350 billion of housing wealth. Findings also indicate that the CFPLs increased maintenance and repair spending for homes that entered foreclosure, mitigating foreclosure externalities, while also boosting mortgage modifications. The CFPLs had minimal adverse side effects in terms of the availability of mortgage credit for new borrowers. Altogether, the CFPLs were a highly effective foreclosure intervention that required no pecuniary subsidy from taxpayers."

What Happens After You Overpay for Your House

Eric Rosenblatt
,
Fannie Mae
Weifeng Wu
,
Fannie Mae

Abstract

"This paper intends to answer the primary question of whether borrowers who overpaid for their house, are more likely to default later on, controlling for other loan-level risk characteristics. Prior to thefinancial crisis in 2008, the US residential markets saw unprecedented appreciation, and then after the crisis, the delinquency and default rates on these mortgage vintages spiked. A natural question of important policy implication is, at the time of origination, is there a way to distinguish these more overvalued loans from the others in the pool, so as to limit the default and loss down the road. Here we use several measures of independent valuations, against which we compare the purchase price. We demonstrate that compared to these model-based benchmark valuations, borrowers who overpay actually are more likely to experience serious default later on. Further we show that even if these borrowers did not incur any default, unsurprisingly they eventually realize less profit when selling the house in an arms-length transactions later on, controlling for the local house appreciation trend. This implies that, these model-based valuations, while by methodological design are not completely removed from the rising or declining price trend, can still detect these most egregiously in ated bubbles, and thus serve as a useful yardstick in prudential lending. In terms of policy, stopping such deals from happening in the first place, will harm neither the lender, GSE nor the borrowers; in fact they will help the borrowers in the long-run too: otherwise they either miserably default more, or if not default, then receive less wealth accumulation from owning this overpaid house."

“Residential House Prices, Commercial Real Estate and Bank Failures”

Anthony Sanders
,
George Mason University
Gary Fissel
,
Federal Deposit Insurance Corporation
Gerald Hanweck
,
George Mason University

Abstract

"The Great Recession resulted in bank failures that greatly exceeded the savings and loan (S&L) crisis in terms of the volume of assets of banks that failed while the percentage of institutions was smaller. Average assets of failed banks in the period from 2008-2011 were 28 times those of banks that failed from 1987 to 1992 as a result of the Thrift Crisis. While much of the literature focuses on “subprime” mortgages and their role in the financial crisis, we focus on the effects of residential housing prices on bank failures. Construction and development lending has typically been a major cause of bank failures. We show that regional residential house prices and construction and land development lending are significant in explaining bank failures through 2011, and regional residential house price movements have been significant factors through 2015. Furthermore, we show how the regional residential house price index (HPI) changes have significant effects during the Great Recession, particularly in the South Atlantic and Pacific states (better known as the “sand states”). In addition, since many of banks’ balance sheet and income statement variables attempt to mimic a regulatory measure of banks’ financial health (CAMELS ratings), we use them and find that bank capitalization, return on assets, natural logarithm of bank assets, and nonperforming assets are statistically significant over the entire period of study from 2007 to 2015. The log of assets estimated coefficients are negative and usually significant for the 2010–2015 failure regressions, but they are positive and significant for the 2009 failure regressions."
Discussant(s)
Brent Ambrose
,
Pennsylvania State University
Souphala Chomsisengphet
,
Office of the Comptroller of the Currency
Walter Torous
,
Massachusetts Institute of Technology
Allen N. Berger
,
University of South Carolina
JEL Classifications
  • G0 - General
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit