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Working Paper
Extended Loan Terms and Auto Loan Default Risk
A salient feature of the $1.2 trillion auto-loan market is the extension of loan maturity terms in recentyears. Using a large, national sample of auto loans from the entire auto market, we find that the default rates on six- and seven-year loans are multiple times that of shorter five-year term loans. Most of the default risk difference is due to borrower risks associated with longer-term loans, as those longer-term auto borrowers are more credit and liquidity constrained. We also find borrowers’ loan-term choice to be endogenous and that the endogeneity bias is substantial in conventional ...
Working Paper
The trust preferred CDO market: from start to (expected) finish
This paper investigates the development, issuance, structuring, and expected performance of the trust preferred securities collateralized debt obligation (TruPS CDO) market. Developed as a way to provide capital markets access to smaller banks, thrifts, insurance companies, and real estate investment trusts (REITs) by pooling the issuance of TruPS into marketable CDOs, the market grew to $60 billion of issuance from its inception in 2000 through its abrupt halt in 2007. As evidenced by rating agency downgrades, current performance, and estimates from the authors' own model, TruPS CDOs are ...
Working Paper
Bank Stress Test Results and Their Impact on Consumer Credit Markets
Using Federal Reserve (Fed) confidential stress test data, we exploit the gap between the Fed and bank capital projections as an exogenous shock to banks and analyze how this shock is transmitted to consumer credit markets. First, we document that banks in the 90th percentile of the capital gap reduce their new supply of risky credit by 13 percent compared with those in the 10th percentile and cut their overall credit card risk exposure on an annual basis. Next, we show that these banks find alternative ways to remain competitive and attract customers by lowering interest rates and offering ...
Working Paper
Mortgage Loss Severities: What Keeps Them So High?
Mortgage loss-given-default (LGD) increased significantly when house prices plummeted during the financial crisis, but it has remained over 40 percent in recent years, despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis is due to a combination of an overhang of crisis-era foreclosures and prolonged liquidation timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5 to 8 percentage points, depending on the tradeoff between lower liquidation expenses and ...
Working Paper
Understanding and measuring risks in Agency CMOs
The Agency CMO market, an often overlooked corner of mortgage finance, has experienced tremendous growth over the past decade. This paper explains the rationale behind the construction of Agency CMOs, quantifies risks embedded in Agency CMOs using a traditional and a novel approach, and offers valuable lessons learned when interpreting these risk measures. Among these lessons is that to fully understand the risks in Agency CMOs a full bond-by-bond analysis is necessary and that interest rate risk is not the only risk that needs to be considered when conducting risk management with CMOs.
Working Paper
Asymmetric Information and the Death of ABS CDOs
A key feature of the 2007 financial crisis is that for many securities trading had ceased; where trading did occur, market prices were well below intrinsic values, especially for ABS CDOs. One explanation is that information had been asymmetric, with sellers having better information than buyers. We first show the information advantages sellers had over buyers in both the issuance of CDOs and, through vertical integration, performance of the CDO collateral that could well have disrupted trading after the onset of the crisis. Using a ?workhorse" model for pricing securities under asymmetric ...
Conference Paper
The trust preferred CDO market : from start to (expected) finish
Working Paper
Designing loan modifications to address the mortgage crisis and the making home affordable program
Delinquencies on residential mortgages and home foreclosures have risen dramatically in the past couple of years. The mortgage losses triggered a broad-based financial crisis and severe recession, which, in turn, exacerbated the initial financial distress faced by homeowners. Although servicers increased their loss mitigation efforts as defaults began to mount, foreclosures continued to occur in cases where both the borrower and investor would be better off if such an outcome were avoided. The U.S. government has engaged in a number of initiatives to reduce such foreclosures. This paper ...
Working Paper
The cost of delay
In this study, we make use of a massive database of mortgage defaults to estimate REO liquidation timelines and time-related costs resulting from the recent post-crisis interventions in the mortgage market and the freezing of foreclosures due to ?robo-signing? revelations. The cost of delay, estimated by comparing today?s time-related costs to those before the start of the financial crisis, is eight percentage points, with enormous variation among states. While costs are estimated to be four percentage points higher in statutory foreclosure states, they are estimated to be 13 percentage ...