ENDOGENOUS/EXOGENOUS SEGMENTATION IN THE A-IRB FRAMEWORK AND THE PRO-CYCLICALITY OF CAPITAL: AN APPLICATION TO MORTGAGE PORTFOLIOS
This paper investigates the pro-cyclicality of capital in the advanced internal ratings-based (A-IRB) Basel approach for retail portfolios and identifies the fundamental assumptions required for stable A-IRB risk weights over the economic cycle. Specifically, it distinguishes between endogenous and exogenous segmentation risk drivers and, through application to a portfolio of first mortgages, shows that risk weights remain stable over the economic cycle when the segmentation scheme is derived using exogenous risk drivers, while segmentation schemes that include endogenous risk drivers are ...
Contract Choice in the Interwar US Residential Mortgage Market
This paper studies mortgage contract choices in US history using a first-of-its-kind sample of residential loans from 1930 and 1940, linked to the decennial censuses. Contract choices reflected borrowers' reactions to the risks posed by different contracts. The majority of borrowers chose contracts with the longest available terms, despite required frequent amortization, likely in order to avoid refinancing risk and to maximize leverage. In contrast, the most creditworthy borrowers with high socioeconomic status preferred short-term contracts, confident that they could refinance at will. The ...
Agency Conflicts in Residential Mortgage Securitization: What Does the Empirical Literature Tell Us?
The agency conflicts inherent in securitization are viewed by many as having been a key contributor to the recent financial crisis, despite the presence of various legal and economic constructs to mitigate them. A review of recent empirical research for the U.S. home mortgage market suggests that securitization itself may not have been a problem, but rather the origination and distribution of observably riskier loans. Low-documentation mortgages, for which asymmetric information problems are acute, performed especially poorly during the crisis. Securitized low-documentation mortgages ...
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom
An expansion in mortgage credit to subprime borrowers is widely believed to have been a principal driver of the 2002?06 U.S. house price boom. Contrary to this belief, we show that the house price and subprime booms occurred in different places. Counties with the largest home price appreciation between 2002 and 2006 had the largest declines in the share of purchase mortgages to subprime borrowers. We also document that the expansion in speculative mortgage products and underwriting fraud was not concentrated among subprime borrowers.
Monetary Incentives and Mortgage Renegotiation Outcomes
This paper studies the effect of monetary incentives on mortgage renegotiation. Lenders are sometimes willing to renegotiate mortgage contracts with homeowners who are at risk of foreclosure. This paper models the renegotiation process as a simple sequential move game in which the homeowner first seeks renegotiation and the lender responds by deciding whether or not to modify the terms of the mortgage. The model is used to examine outcomes in the presence of monetary incentives given to the homeowner and lender like those given by U.S. government programs during the recent foreclosure crisis. ...
The Missing Boomerang Buyers
Does it matter whether those who lost their homes during the crisis come back to the housing market?
Which Way to Recovery? Housing Market Outcomes and the Neighborhood Stabilization Program
To help communities recover from the foreclosure crisis, Congress enacted a set of policies known as the Neighborhood Stabilization Program (NSP). NSP's objective was to mitigate the impact of foreclosures on neighboring properties, through reducing the stock of distressed properties and removing sources of visual blight. This paper presents evidence on production outcomes achieved through the second round of NSP funding (NSP2), and discusses the housing market context under which the program operated from 2010 to 2013. Two key findings emerge. First, local grantees undertook quite different ...
Multiperiod Loans, Occasionally Binding Constraints, and Monetary Policy: A Quantitative Evaluation
We study the implications of multiperiod mortgage loans for monetary policy, considering several realistic modifications?fixed interest rate contracts, a lower bound constraint on newly granted loans, and the possibility of the collateral constraint to become slack?to an otherwise standard DSGE model with housing and financial intermediaries. We estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent US housing market boom and bust. We show how the nonlinearities associated with the two constraints ...
Tracking and stress-testing U.S. household leverage
Housing equity is an important component of borrowers? wealth and a critical determinant of their vulnerability to shocks. In this article, the authors use a unique, newly created data set to analyze the evolution of household leverage?defined here as the ratio of housing debt to housing values?over time and across locations in the United States, at the micro level. They find that leverage was at a very low point just prior to the large declines in house prices that began in 2006, and rose very quickly through 2012, in spite of reductions in housing debt. As of early 2017, leverage statistics ...
Can We Take the “Stress” Out of Stress Testing? Applications of Generalized Structural Equation Modeling to Consumer Finance
Financial firms, and banks in particular, rely heavily on complex suites of interrelated statistical models in their risk management and business reporting infrastructures. Statistical model infrastructures are often developed using a piecemeal approach to model building, in which different components are developed and validated separately. This type of modeling framework has significant limitations at each stage of the model management life cycle, from development and documentation to validation, production, and redevelopment. We propose an empirical framework, spurred by recent developments ...