Friday, Jan. 5, 2018 2:30 PM - 4:30 PM
- Chair: Wayne Passmore, Federal Reserve Board
Eyes Wide Shut? Mortgage Insurance During the Housing Boom
AbstractIn the U.S., private mortgage insurance (PMI) is mandated for high-leverage mortgages purchased by Fannie Mae and Freddie Mac, to help serve as a private market check on GSE risk-taking. However, we document that PMI companies - contradicting the industry’s own research regarding housing risk - expanded dramatically into high-risk contracts at the tail-end of the housing boom. We examine patterns of PMI application denial rates, default rates on PMI-backed loans, and growth rates of high-leverage lending, around the GSE conforming loan limit, along with information extracted from company, industry and regulatory filings and reports, to argue that PMI behavior during the housing boom reflects a moral hazard problem inherent to insurance companies. Our results suggest that rather than acting as a check on risky behavior, private mortgage insurers exacerbated the moral hazard problem of the GSEs.
Changing the Footprint of GSE Loan Guarantees: Estimating Effects on Mortgage Pricing and Availability
AbstractWe estimate the effects of marginal changes to the loan limits above which Fannie Mae and Freddie Mac (GSEs) are unable to guarantee and securitize loans and to the fees that the GSEs charge for guaranteeing mortgage loans (g-fees). Using a dataset of daily rate sheets by dozens of large mortgage lenders, we show that the average price difference across the loan limit is on the order of 5 basis points, though it masks considerable variation across lenders and loan characteristics. We show that changes in g-fees are close to fully passed-through to consumers; however, they are also dwarfed by existing price dispersion across lenders. We estimate the responsiveness of consumer demand to changes in interest rates of this magnitude. Finally, using our estimates above, we evaluate the effects of hypothetical marginal changes in both g-fees and loan limits.
Effects of FHA Loan Limit Increases by ESA 2008: Housing Demand and Adverse Selection
AbstractThis paper examines the impacts of changes in the Federal Housing Administration (FHA) insured loan limit in response to the Economic Stimulus Act (ESA) of 2008. We examine the number of transactions and average loan-to-value ratios for loans originated in high-cost areas and low-cost areas, before and after the ESA policy change. We find that the increase in loan limits does result in larger demand for FHA loans with higher LTV. However, the additional demand for loans was less likely to be driven by larger demand for housing purchase. We find evidence of increased adverse selection in the sense that increased loan limits induced riskier borrowers, and that much of the increased demand for FHA loans came at the expense of other loans. In particular, newly qualified borrowers, especially via cash-out refinance loans, are more likely to take advantage of increased loan limit policy. A further analysis indicates that the newly qualified loans had higher default rates and higher loss given default rate.
- G2 - Financial Institutions and Services
- L1 - Market Structure, Firm Strategy, and Market Performance