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Risk and Delinquency in Mortgage Markets

Paper Session

Saturday, Jan. 4, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Nautical
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Kristopher Gerardi, Federal Reserve Bank of Atlanta

Loan Servicing and Management of Delinquent Loans

Anurag Mehrotra
,
San Diego State University
Henry Munneke
,
University of Georgia

Abstract

In this paper, we explore the actions of servicers of loans guaranteed by Fannie Mae, a Government-Sponsored Enterprise (GSE). Fannie Mae agency servicers operate under master servicing agreements that, if followed, creates a servicing entity controlling roughly twenty-seven percent of all outstanding mortgage debt. The action or inaction of these servicers in managing severely delinquent loans may impact the housing market especially in light of a probable negative price externality associated with foreclosure. Our results show that agency servicers have a reduced probability of foreclosing on a loan in areas where they have high geographic concentration of loans. This is even true in the face of increased foreclosure activity by other small non-agency servicers. These actions are consistent with the idea that agency servicers are trying to internalize the negative price externality caused by foreclosure on their remaining servicing portfolio.

Private Capital and Mortgage Stress. Evidence from Natural Disasters and the Credit Risk Transfers.

Franco Zecchetto
,
Technological Autonomous University of Mexico (ITAM)
Pedro Gete
,
IE University
Athena Tsouderou
,
IE University
Susan M. Wachter
,
University of Pennsylvania

Abstract

We study how private capital in mortgage markets would absorb credit risk. Our identification exploits Hurricanes Harvey and Irma and the Credit Risk Transfers (CRT) issued by the GSEs. CRTs are structured securities to transfer some of their credit risk to private investors. CRTs differ in the geographical and loan-to-value composition of their reference pool, and in subordination class. These heterogeneities generate differences in exposure to the mortgage defaults caused by the hurricanes. We find significant increases in the price of credit risk right after the hurricanes' landfall. One percentage point larger geographical exposure to disaster areas increases the compensation investors demand by 200 basis points on average, which is 80% of the standard deviation of the CRT secondary market pricing.

Harping on about HARP: Consequences of Ineligibility for the Home Affordable Refinance Program

Mariya Letdin
,
Florida State University
Meagan McCollum
,
University of Tulsa

Abstract

"We analyze the impact of being ineligible for the Home Affordable Refinance Program (HARP). Using a comparable sample of borrowers with Freddie Mac loans and privately securitized loans (Bbx) we analyze loan performance and quantify potential wealth, consumption and credit consequences for prime borrowers whose loans were placed in private securitization pools and who were thus ineligible for HARP. We
estimate that such private borrowers are annually approximately 9% less likely to prepay their mortgages after the HARP announcement than comparable borrowers whose mortgages are owned or secured by Freddie Mac. We find significant loss in wealth and increase in default for a comparable set of borrowers in the private loan sample. The greatest detriment is documented in CBSAs with the largest housing price declines in
the financial crisis. "

Credit Risk Transfers: Optimal Structuring

Robert Van Order
,
George Washington University
Rose Lai
,
University of Macau

Abstract

Fannie Mae and Freddie Mac, at the instigation of their regulator, have undertaken Credit Risk Transfer (CRT) programs that share some of their risk with private investors. This is not new: Freddie Mac sold off some risk at the turn of the millennium. The new structures are essentially synthetic CDOs, not unlike the infamous “Abacus” deal from 2007. However, the new structures are different and with different incentives for risk-taking. We analyze CRTs via a model of optimal incentives, and we contrast them with the incentive problems of Abacus. We conclude that the deals are similar to our optimal structure, which has deal managers holding a “vertical slice” of the deal, as opposed to first-loss retention in some securitization deals.
Discussant(s)
Thao Le
,
Georgia State University
W. Scott Frame
,
Federal Reserve Bank of Dallas
Stephen H. Shore
,
Georgia State University
Paul Willen
,
Federal Reserve Bank of Boston
JEL Classifications
  • G2 - Financial Institutions and Services
  • R2 - Household Analysis