Mortgages and Public Policy
Paper Session
Friday, Jan. 7, 2022 12:15 PM - 2:15 PM (EST)
- Chair: Lauren Lambie-Hanson, Federal Reserve Bank of Philadelphia
The Imitation Game: How Encouraging Renegotiation Makes Good Borrowers Bad
Abstract
Do borrowers default in order to obtain favorable loan modifications? We examine whether CMBS loan borrowers default following principal reductions (Discounted Payoffs, aka DPOs) by their special servicer. We exploit a 2009 tax law change that increases the incentive of financially healthy borrowers to mimic distressed borrowers because it allows borrowers to obtain loan modifications prior to becoming delinquent. We show that the law change increases the likelihood that loans are transferred to special servicing following a DPO on another loan. Additionally, loans transferred following a DPO are more likely to realize full payoffs ex-post. Overall, our results are consistent with financially healthy borrowers attempting to extract concessions from servicers by imitating distressed borrowers, which suggests substantial asymmetric information between borrowers and lenders.Mortgage Delinquency and Default: A Tale of Two Options
Abstract
Much of the recent research on mortgage default has used 60-day or 90-day delinquency, rather than actual loss of property, as the measure of default. However, delinquency (missed payment) and default (loss of the property) represent different behavior and different policy implications. We find that delinquency is more affected by personal characteristics and underwriting standards, but default rates, conditional on delinquency, are affected almost entirely by negative equity. Studies that have used delinquency instead of default have overestimated the importance of underwriting variables and borrower characteristics in assessing causes of actual losses and effects of foreclosure, for instance in the Great Recession. This can generate mistakes in capital regulation by requiring too much capital for risky underwriting and too little for low down payment.When Business is Personal: How the Paycheck Protection Program Affected Credit Market Outcomes for the Self-Employed
Abstract
In response to the COVID-19 pandemic and widespread business closures, Congress enacted the Paycheck Protection Program (PPP) to provide forgivable loans to small businesses to maintain payroll obligations and to non-employers to provide income support. In this paper we estimate the relationship between PPP loans and personal credit market outcomes amongst the self-employed. Overall, we find that within a zip code, a one percentage point increase in the share of non-employer businesses that received a PPP loan is associated with roughly a 7 basis point drop in mortgage non-payment (enrollment in forbearance or delinquency). This relationship is driven by a reduction in forbearance which is persistent over a period of several months. In addition to mortgage payment, PPP loans were also associated with a reduction in credit card delinquencies. While PPP evaluations have focused on its direct employment effects, our results suggest that the PPP provided a boost to the financial health of self-employed business owners.Discussant(s)
Paolina Medina
,
Texas A&M University
Sanket Korgaonkar
,
University of Virginia
Wenhua Di
,
Federal Reserve Bank of Dallas
Emil Verner
,
Massachusetts Institute of Technology
JEL Classifications
- R0 - General