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Real Estate Credit and Securitization

Paper Session

Friday, Jan. 3, 2020 10:15 AM - 12:15 PM (PDT)

Manchester Grand Hyatt, Cortez Hill B
Hosted By: International Banking, Economics, and Finance Association
  • Chair: Ricardo Correa, Federal Reserve Board

The Market for Mortgage Modification: Evidence from a Large-Scale Renegotiation

Terry O'Malley
,
Central Bank of Ireland
Claire Labonne
,
Federal Reserve Bank of Boston
Fergal McCann
,
Central Bank of Ireland

Abstract

We study mortgage modifications in Ireland from 2012 to 2017, a setting where defaults are among the highest on record; foreclosure threat is weak; banks are incentivized to modify under threat of provisioning penalty but have full discretion on the type and depth of modification offered. A bargaining framework poses three research questions which we analyse using rich loan and household-level data. Firstly, studying borrower engagement with the modification process, we show that despite the weak threat of foreclosure, borrowers are twice as likely to preemptively renegotiate as they are to default without renegotiation. We then study modification outcomes conditional on borrowers’ engagement. Borrowers with positive ability to repay are less likely to receive a modification and often receive no reduction in repayments, while those with moderate levels of payment difficulty are most likely to receive a modification, and receive the largest cuts in repayment when modified. Finally, we show that re-default is mitigated by larger cuts to repayments.

The Geography of Mortgage Lending in Times of FinTech

Christoph Basten
,
University of Zurich
Steven Ongena
,
University of Zurich

Abstract

We analyze how banks’ inter-regional mortgage allocations change when an online platform enables them to offer to regions where they have no branches. Unique data on responses from different banks to each mortgage application yield three novel findings. First, banks offer more and cheaper credit to borrowers in previously more concentrated markets, identified with quasi-experimental overseas bank losses. Second, banks prefer lending to regions where collateral prices are less correlated with those at home, identified with linguistic differences, or where current prices seem less over-heated. Third, over time offers become more automated, lowering operational costs.

Digging into the Black Box of Portfolio Replenishment in Securitization: Evidence from the ABS Loan-Level Initiative

Arved Fenner
,
University of Münster
Philipp Klein
,
University of Muenster
Carina Moessinger
,
University of Muenster

Abstract

With the introduction of simple, transparent, and standardized(STS) securitizations in Europe in 2019, loans which are transferred to the special-purpose entity after the closing of the transaction, i. e. ex post, shall meet the eligibility criteria applied to the initial underlying exposures. We analyze an extensive data set on 95 ABS backed by more than 1.6 million SME loans in the period from 2013 until 2017 from the central repository under the ECB loan-level initiative. Our study reveals that loans added to ABS portfolios ex post perform worse than loans being part of the initial ABS portfolio since originators choose low-quality loans to include in ABS portfolios after the closing. As loans added to the ABS portfolio ex post also show lower performance compared to similar loans removed from the portfolio prior to ABS maturity, average loan performance in the portfolio declines. Turning to the bank perspective, we find that originators being undercapitalized or exhibiting high NPL ratios make particularly use of portfolio replenishment. The opposite holds if originators specify loan eligibility criteria in their ABS prospectuses.

Capital Flows, Real Estate, and Local Cycles: Evidence from German Cities, Banks, and Firms

Peter Bednarek
,
Deutsche Bundesbank
Chang Ma
,
Fudan University
Daniel Marcel te Kaat
,
University of Groningen
Alessandro Rebucci
,
Johns Hopkins University

Abstract

We study the role of real estate markets in the transmission of bank-flow shocks to output in Germany. Identification exploits a policy assigning refugees to municipalities on a quasi-random basis and exogenous variation in the non-developable area. We estimate that, during the 2009-2014 period, for every 100-basis-point increase in the PIGS spread, which captures well German cross-border bank flows, cities most exposed to refugees and non-developable area grow 15-25 basis points more than the least exposed ones. Spread increases shift credit to firms with more real estate collateral. More collateral leads firms to hire and invest more, without evidence of misallocation.
Discussant(s)
Gustavo Suarez
,
Federal Reserve Board
Sofia Johan
,
Florida Atlantic University
Yuliya Demyanyk
,
Federal Reserve Bank of Cleveland
Isaac Hacamo
,
Indiana University
JEL Classifications
  • G1 - General Financial Markets
  • L1 - Market Structure, Firm Strategy, and Market Performance