Real Estate Finance

Paper Session

Saturday, Jan. 7, 2017 2:30 PM – 4:30 PM

Sheraton Grand Chicago, Chicago Ballroom X
Hosted By: American Finance Association
  • Chair: Itzhak Ben-David, Ohio State University and NBER

Are Lemons Sold First? Dynamic Signaling in the Mortgage Market

Manuel Adelino
,
Duke University
Kristopher Gerardi
,
Federal Reserve Bank of Atlanta
Barney Hartman-Glaser
,
University of California-Los Angeles

Abstract

A central result in the theory of adverse selection in asset markets is that informed sellers can signal quality and obtain higher prices by delaying trade. This paper provides some of the first evidence of a signaling mechanism through delay of trade using the residential mortgage market as a laboratory. We find a strong relation between mortgage performance and time-to-sale for privately-securitized mortgages. Additionally, deals made up of more seasoned mortgages are sold at lower yields. These effects are strongest in the "Alt-A" segment of the market where buyers had less hard information about mortgages.

Sustainable Housing Policy

Itay Goldstein
,
University of Pennsylvania
Deeksha Gupta
,
University of Pennsylvania

Abstract

Investment in housing is often thought of as an important tool for household wealth accumulation and for stimulating economic activity. As such, many policies aim to promote investment in housing and support housing prices. However, empirical research on the effect of such policies on wealth accumulation and investment in the economy is mixed. In this paper, we develop a comprehensive framework for studying the effect of housing investment on household wealth accumulation and the form that such policies should take. We find that when households are financially constrained, the price of housing generates externalities on investment in the economy and subsequently on household wealth accumulation. At times, it can be optimal to decrease the price of housing rather than to support high housing prices. Contrary to standard economic theory, we find that subsidizing the demand-side of the housing market and the supply-side of the market have different effects on welfare. When the return from real estate investment is high, a combination of subsidies for construction companies and taxes on purchases of houses can be optimal.

The Impact of Positive Payment Shocks on Mortgage Credit Risk: A Natural Experiment From Home Equity Lines of Credit at End of Draw

Min Qi
,
Office of the Comptroller of the Currency
Harald Scheule
,
University of Technology Sydney

Abstract

Using a unique loan-level residential home equity data from the largest US mortgage servicers that contains a large number of loan attributes and borrower characteristics, we find that default risk of home equity lines of credit (HELOCs) increases with the size of positive payment shocks. Furthermore, default risk increases at end of draw (EOD) when borrowers first experience liquidity constraints and cannot refinance under tightened lending standards. Our findings are robust across different model specifications and risk segments, using clustered standard errors and controlling for the sample selection bias from HELOC payoffs prior to EOD. Since an unprecedented number of HELOCs are expected to reach their EOD period in 2016-2017, we provide several prudential recommendations for lenders and regulators. These include (i) capturing payment shocks and liquidity constraints in credit risk models, (ii) smoothing payment shocks in contract designs as well as work out process, and (iii) coordination in loosening or tightening HELOC lending standards.

Shuffling Through the Bargain Bin: Real Estate Holdings of Public Firms

Irem Demirci
,
University of Mannheim
Umit Gurun
,
University of Texas-Dallas
Erkan Yonder
,
Ozyegin University

Abstract

Using a novel and detailed transaction-level data set of commercial real estate assets, we construct real estate asset portfolios for a comprehensive set of public firms between 2000 and 2013. We find that bank loan spreads incorporate information not only on the alternative uses of a borrower's real estate portfolio, but also the number of that portfolio's potential buyers. Using surges of foreign investor demand from countries with increased policy uncertainty and also local land-supply elasticity information, we identify plausibly exogenous shocks to commercial real estate prices. We find that, after a region experiences large foreign investor demand, loan spreads become less sensitive to collateral value of real estate holdings.
Discussant(s)
Christopher Palmer
,
University of California-Berkeley
Tomasz Piskorski
,
Columbia University
Taylor Nadauld
,
Brigham Young University
Maisy Wong
,
University of Pennsylvania
JEL Classifications
  • G2 - Financial Institutions and Services