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  5. Limitations to Leverage
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Limitations to Leverage

Paper Session

Friday, Jan. 3, 2025 10:15 AM - 12:15 PM (PST)

San Francisco Marriott Marquis, Nob Hill C
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Andrea Heuson, University of Miami

Financial Impacts of Environmental Regulations: Socioeconomic Inequity in a Greening Economy

Yu Shan
,
Syracuse University
Joonsung Won
,
CUNY-Baruch College

Abstract

This paper demonstrates that environmental regulations aimed at achieving environmental justice can cause inequity in other socioeconomic domains. Using the PM2.5 NAAQS nonattainment designations in 2005 and novel data on PM2.5 levels, we find a 4.2% decline in mortgage approval rates in nonattainment areas, with the impacts particularly pronounced among disadvantaged households. Mortgage lenders selectively originate loans backed by higher-value properties. Housing supply declines as a result of a reduction in issued building permits and an increase in costs associated with diesel-powered construction machinery. Our findings highlight a cost to disadvantaged households and raise socioeconomic inequity concerns in environmental regulations.

Mortgage Seasonality, Capacity Constraints, and Lender Responses

Feng Liu
,
Consumer Financial Protection Bureau
Young Jo
,
Consumer Financial Protection Bureau

Abstract

The housing market is highly seasonal, which implies fluctuations in the number of applications mortgage lenders receive. Using the confidential version of the mortgage application data collected through the Home Mortgage Disclosure Act (HMDA), we examine if lenders ration credits when their mortgage processing capacity is constrained due to an increase in demand during a high home purchase season. We show that seasonal variations in mortgage applications exist both inter-temporally and across geographic areas, coinciding with climate patterns. Using this variation, we find that between 2018 and 2022, refinance applications were more likely to be denied during a high home purchase season compared to a low season even after controlling for extensive sets of loan and credit characteristics. We also find that Black and Hispanic applicants are more likely to be affected by credit rationing due to lender capacity constraints.

This study is the first to examine lenders' response to capacity constraints driven by a demand shift using a novel identification strategy. The identification strategy relies on the fact that the variations in credit characteristics of refinance applications are not correlated with the variations in overall credit demand and the likelihood of capacity constraints during high seasons. We provide suggestive evidence that lenders use soft information or apply discretion differently during high seasons compared to low seasons, disproportionately affecting racial minority borrowers who represent a higher share of marginal applicants. We find that loans originated during high seasons have higher default probability than loans originated during low seasons, implying that the quality of loan officer's work deteriorates when they are overworked.

Revenge of the S&Ls: How Banks Lost a Half Billion Dollars during 2022

Susan Wachter
,
University of Pennsylvania
Rebel Cole
,
Florida Atlantic University
Brian Silverstein
,
Kansas State University
Jon Taylor
,
Florida Atlantic University
Lawrence White
,
New York University

Abstract

Abstract: During 2022, U.S. commercial banks reported more than $500 billion in unrealized losses on their investment securities portfolios as the Federal Reserve Board raised its target interest rate by 400 basis points to combat inflation. In many ways, this was strikingly similar to the unrealized losses on residential mortgages experienced by savings & loans in the early 1980s as the Federal Reserve Board raised interest rates to combat inflation – despite the regulatory reforms that were put into place after that crisis. In this study, we analyze the role of investments by banks in different types of securities (Treasuries, munis, RMBS, and CMBS) and different types of mortgages (commercial and residential) in explaining these losses. We find that investments in RMBS were the most pernicious, as banks “reached for yield” during 2020-2021 as they coped with massive deposit inflows associated with pandemic relief programs. We also investigate whether markets price these losses, and whether, if such recognition is not occurring, there is a need for better regulatory oversight of interest rate risk. We find mixed evidence on the market pricing of these losses.

Women are Left Behind: Social Norms, Math Skills and Mortgage Outcomes

Athena Tsouderou
,
University of Miami
Selale Tuzel
,
University of Southern California

Abstract

Analyzing a near-universe sample of U.S. conventional mortgages originated and securitized in 2018-2019, we find that single women pay higher mortgage interest rates and are less likely to refinance when rates decline compared to single men, particularly in high-income, highly educated neighborhoods. This gender gap partly reflects differences in math skills and financial literacy, which tend to widen with socioeconomic status. These findings align with prevailing gender stereotypes and societal norms, contributing to disparities in financial sophistication that result in less favorable mortgage outcomes for women.

Discussant(s)
Stanimira Milcheva
,
University College London
Dilya Dimova
,
Department of Housing and Urban Development
Andrea Heuson
,
University of Miami
Maeve Maloney
,
Fannie Mae
JEL Classifications
  • R0 - General