Borrower Behavior, and Mortgage Losses
Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM
- Chair: Michael Lacour-Little, California State University-Fullerton and Fannie Mae
Loan to Value Limits and House Prices
Abstract"This study evaluates the effect of loan-to-value (LTV) limits on house prices. The identification strategy exploits variation in LTV limits induced by Hong Kong Monetary Authorities decision to introduce differentiated LTV limits anchored on the value of the property, which allows us to observe the counterfactual house price development. We estimate an elasticity of 0.8 between LTV limits and house prices: A one percentage point decrease in LTV limits reduce house prices by 0.8 percentage points. Overall, our results document that macro-prudential policies, that regulate access to financing, are an effective policy tool to control house price growth.
Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom
AbstractAn expansion in mortgage credit to subprime borrowers is widely believed to have been a
principal driver of the 2002-2006 U.S. house price boom. Contrary to this belief, we show that
the house price and the 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.
Mortgage Losses: Loss on Sale and Holding Costs
AbstractAccording to the Financial Accounting Standards Board’s (FASB) Current Expected Credit Loss (CECL) impairment standard, by 2021 all banks will be required to forecast losses for mortgages over the “life of the loan.” This paper provides a method for banks to model such losses, focusing on the magnitude of loss for mortgages that have defaulted. Those losses have two elements: the financial loss associated with the sale of the property and costs associated with the time it takes for the default to be processed and eventually sell the property (holding costs). The results show that both the dollar loss on the sale and the time-related holding costs have substantial variations across space and over time. Most of the losses are associated with the sale of a property not the holding costs. This variation can, at least in part, be attributed to borrower and loan characteristics and economic conditions. The legal environment (borrower and lender rights) can have strong effects on the length of the holding period (the default timeline) and therefore holding costs, but there is no evidence that it has an impact on the dollar loss associated with the sale of the property.
- G2 - Financial Institutions and Services
- R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location