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Journal Article
Residential mortgage default
In ?Residential Mortgage Default,? Ronel Elul discusses the models that economists have developed to help us understand the default risk inherent in home mortgages and how default risk and house prices are related. He also applies these models to show how falling house prices would affect mortgage default rates today and explores the impact that rising default rates would have on financial institutions and other participants in the mortgage market. ; Also issued as Payment Cards Center Discussion Paper No. 06-10
Working Paper
Owner-Occupancy Fraud and Mortgage Performance
We use a matched credit bureau and mortgage dataset to identify occupancy fraud in residential mortgage originations, that is, borrowers who misrepresented their occupancy status as owner-occupants rather than residential real estate investors. In contrast to previous studies, our dataset allows us to show that – during the housing bubble – such fraud was broad based, appearing in the government-sponsored enterprise market and in loans held on bank portfolios as well, and increases the effective share of investors by 50 percent. We show that a key benefit of investor fraud was obtaining a ...
Working Paper
Concentration in Mortgage Markets: GSE Exposure and Risk-Taking in Uncertain Times
When home prices threaten to decline, large investors may attempt to prop up prices by fostering new lending. We show this motive increased acquisitions of risky mortgages by the government-sponsored enterprises in the first half of 2007. When home prices threaten to decline, large mortgage investors can benefit from fostering new lending that boosts demand. We ask whether this benefit contributed to the growth in acquisitions of risky mortgages by the government-sponsored enterprises (GSEs) in the first half of 2007. We find that it helps explain the variation of this growth across regions ...
Journal Article
What have we learned about mortgage default?
By the end of 2009, one out of every 11 mortgages was seriously delinquent or in foreclosure. Economists have devoted considerable energy over the past several years to understanding the underlying causes of this increase in defaults. One goal is to provide a guide to dealing with the existing problems. In addition, a better understanding may help avoid future problems. In ?What Have We Learned About Mortgage Default?? Ronel Elul reviews recent research that has shed light on two areas: the extent to which securitization is responsible for the increase in default rates; and the relative ...
Journal Article
Helping Struggling Homeowners During Two Crises
What the Great Recession Can Teach Us About Mortgage Troubles in the Wake of COVID-19
Journal Article
Liquidity crises
Financial markets have experienced several episodes of ?liquidity crises? over the past 20 years. One prominent example is the collapse of the Long Term Capital Management hedge fund in 1998. The recent market disruption brought about by the downturn in subprime mortgages also shares many features with liquidity crises. What is liquidity? Why does it sometimes seem that the market?s supply of it is insufficient? Can anything be done about it? In ?Liquidity Crises,? Ronel Elul outlines some theories of market liquidity provision, how it breaks down in times of crisis, and some possible ...
Working Paper
How Big is the Wealth Effect? Decomposing the Response of Consumption to House Prices
We investigate the effect of declining house prices on household consumption behavior during 2006-2009. We use an individual-level dataset that has detailed information on borrower characteristics, mortgages and credit risk. Proxying consumption by individual-level auto loan originations, we decompose the effect of declining house prices on consumption into three main channels: wealth effect, household financial constraints, and bank health. We find a negligible wealth effect. Tightening householdlevel financial constraints can explain 40-45 percent of the response of consumption to declining ...
Working Paper
Bankruptcy: Is it enough to forgive or must we also forget?
In many countries, lenders are not permitted to use information about past defaults after a specified period of time has elapsed. The authors model this provision and determine conditions under which it is optimal. ; They develop a model in which entrepreneurs must repeatedly seek external funds to finance a sequence of risky projects under conditions of both adverse selection and moral hazard. They show that forgetting a default makes incentives worse, ex-ante, because it reduces the punishment for failure. However, following a default it is generally good to forget, because pooling riskier ...
Working Paper
Understanding house price index revisions
Residential house price indexes (HPI) are used for a large variety of macroeconomic and microeconomic research and policy purposes, as well as for automated valuation models. As is well known, these indexes are subject to substantial revisions in the months following the initial release, both because transaction data can be slow to come in, and as a consequence of the repeat sales methodology, which interpolates the effect of sales over the entire period since the house last changed hands. We study the properties of the revisions to the CoreLogic House Price Index. This index is used both by ...