Mortgage Contracts and Lending

Paper Session

Friday, Jan. 6, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Ontario
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Tomasz Piskorski, Columbia University

Funding Fragility and Pipeline Risk in the Residential-Mortgage Market

Nancy Wallace
,
University of California-Berkeley
David Echeverry
,
University of California-Berkeley
Richard Stanton
,
University of California-Berkeley

Abstract

We develop a model of funding liquidity in the mortgage origination market under trade imbalances. Repo sellers absorb temporary supply excesses, and haircuts counter price fluctuations. Because haircuts target a given Value at Risk, which depends on the information available to the repo buyer as well as on market fundamentals, they will respond differently in different market segments, characterized by lower securitization speeds and higher volatilities. In particular, a higher volatility in the securitization schedule leads to haircuts being larger in magnitude, which itself leads to the market having a lower capacity. An overestimation of market speed or an underestimation of its volatility reduces the stability of margins. Markets subject to higher volatilities are more fragile. We apply the model to understand the attributes of GSE and private label securitization markets.

Management Compensation and Risk Transfer: Evidence from Mortgage Lending and Securitization

Yongqiang Chu
,
University of South Carolina
Tao Ma
,
University of South Carolina
Xiumin Martin
,
Washington University-St. Louis

Abstract

We examine how management compensation policies affect bank mortgage lending and securitization decisions using exogenous variation in stock option grants generated by FAS 123R, which requires all firms to expense options. Embedding a difference-in-differences specification within a multinomial logit model, we find that reduced option compensation causes the treated banks to be more likely to sell risky mortgages for securitization, that is, to transfer risk off their own balance sheets. Interestingly, however, they do become more likely to reject risky mortgage applications, that is, option compensation does not change the overall riskiness of approved mortgages. Furthermore, the effect is concentrated in large banks, suggesting that managers’ risk-taking incentives at large banks are more sensitive to option compensation.

On an Efficient Design of the Reverse Mortgage: Structure, Marketing, and Funding

Rose Neng Lai
,
University of Macau
Robert Merton
,
Massachusetts Institute of Technology

Abstract

Reverse mortgages are useful instrument to alleviate the continuous and steady consumption needs of retirees. The puzzle is why there has been rather modest uptake even in the US, UK, and Korea where it has been available for a considerable time. We will propose a structural design for a reverse mortgage contract that works across geopolitical borders, including key design criteria, issues of education/marketing for both the retirees and their beneficiaries, and a feasible approach to funding reverse mortgage with reliable, cost-efficient supply of funds available consistently so that the reverse mortgages can be supported as a standard consideration for everyone considering for retirement. We will also examine the role of the government as regulator and as risk-bearing provider, in the reverse mortgage process. Our preliminary work suggests that an effective institutional means of funding reverse mortgages is likely to be considerable different from current practice.

A Dynamic Model of Reverse Mortgage Borrower Behavior

Wei Shi
,
Ohio State University
Jason Blevins
,
Ohio State University
Donald Haurin
,
Ohio State University
Stephanie Moulton
,
Ohio State University

Abstract

We carry out an empirical analysis of the Home Equity Conversion Mortgage (HECM) program using a unique and detailed dataset on the behavior of HECM borrowers from 2006--2012 to semiparametrically estimate a structural, dynamic discrete choice model of borrower behavior. Our estimator is based on a new identification result for models with multiple terminating actions where we show that the utility function is identified without the need to impose ad hoc identifying restrictions (i.e., assuming that the payoff for one choice is zero). Such restrictions are required to identify more general models, but they also lead to incorrect counterfactual choice probabilities and welfare calculations. Our estimates, which are robust to these issues, provide insights about the factors that influence HECM refinance, default, and termination decisions. We use the results to quantify the trade-offs involved for proposed program modifications. We find that income and credit requirements would indeed be effective in reducing undesirable HECM outcomes, at the expense of excluding some borrowers, and we quantify the relative welfare losses due to restricting access to the program. We also investigate how shocks to housing prices affect HECM outcomes and household welfare.
Discussant(s)
David Skeie
,
Texas A&M University
Taylor Nadauld
,
Brigham Young University
Barney Hartman-Glaser
,
University of California-Los Angeles
Thomas Davidoff
,
University of British Columbia
JEL Classifications
  • G2 - Financial Institutions and Services
  • R2 - Household Analysis