Mortgage Markets

Transparency in the Mortgage Market
(with Andrey D. Pavlov and Albert Zevelev)
Journal of Financial Services Research, Vol.49, Issue 2, June 2016, 265-280.
Why are Aggressive Mortgage Products Bad for the Housing Market? (with Andrew Davidson, Alex Levin, and Andrey D. Pavlov)
Journal of Economics and Business, March 2016, 148-161.
Credit Supply and Housing Prices in National and Local Markets
Public Finance Review, Vol. 44 Issue 1, December 2015, 6-21.
Second Liens and the Leverage Option (with Adam J. Levitin)
Vanderbilt Law Review, Vol. 68, October 2015, 1243-1294.
Housing America: The Unequal Geography of Risk and Opportunity
Housing Policy Debate, Volume 25, Issue 4, July 2015, 813-816.
The Market Structure of Securitisation and the US Housing Bubble
National Institute Economic Review, No. 230, November 2014, 34-44.
The Commercial Real Estate Bubble (with Adam J. Levitin)
Harvard Business Law Review, Vol. 3, Summer 2013, 83-118.
Mortgage Product Substitution and State Anti-Predatory lending Laws: Better Loans and Better Borrowers? (with Raphael W. Bostic, Souphala Chomsisengphet, Kathleen C. Engel, Patricia A. McCoy, and Anthony N Pennington-Cross)   Abstract  
Atlantic Economic Journal, Vol. 40, 2012, p. 273

Mounting foreclosures and recent disclosures of abusive lending practices have led many states to adopt new anti-predatory lending laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining if the market responded to these laws by substituting different mortgage products for those restricted by anti-predatory lending provisions. The evidence indicates that the new laws were effective in restricting loans with targeted characteristics and that the market substituted other product types to maintain affordability in the face of these restrictions.

Will Private Risk-Capital Return? The Dodd-Frank Act and the Housing Market (with Adam J. Levitin and Andrey D. Pavlov)   Abstract  
Yale Journal on Regulations, Vol. 29,No.1, Winter 2012, p.155-180

Private risk capital has virtually disappeared from the U.S. housing finance market since the market’s collapse in 2008. This Article argues that private risk capital is unlikely to return on any scale until the informational problems in housing finance are resolved so that investors can accurately gauge and price the risks they assume. The Dodd-Frank Act represents a first step in reforming the U.S. housing finance. It takes a multi-layered approach, regulating both loan origination and securitization. Dodd-Frank’s reforms, however, fail to adequately address the opacity of credit risk information in mortgage markets and thus are insufficient for the restoration of private risk capital. The Article argues that Dodd-Frank reforms like “skin-in-the-game” credit risk retention fail to solve the informational problems in the housing finance market, as they merely replace one informational opacity with another. Instead, the Article argues, it is necessary to institute structural changes in the housing finance market, particularly the standardization of mortgage securitization, that force the production of information necessary for accurate risk-pricing.

Subprime Lending and Real Estate Prices (with Andrey Pavlov)   Abstract  
Real Estate Economics, Vol. 38, No. 1, Spring 2011, p.1-17

This article establishes a theoretical and empirical link between the use of aggressive mortgage lending instruments, such as interest-only, negative-amortization or subprime mortgages, and the underlying house prices. Such instruments, which come into existence through innovation or financial deregulation, allow more borrowing than otherwise would occur in previously affordability-constrained markets. Within the context of a model with an endogenous rent-buy decision, we demonstrate that the supply of aggressive lending instruments temporarily increases the asset prices in the underlying market because agents find it more attractive to own or because their borrowing constraint is relaxed, or both. This result implies that the availability of aggressive mortgage lending instruments magnifies the real estate cycle and the effects of fundamental demand shocks. We empirically confirm the predictions of the model using recent subprime origination experience. In particular, we find that regions that receive a high concentration of aggressive lending instruments experience larger price increases and subsequent declines than areas with low concentration of such instruments. This result holds in the presence of various controls and instrumental variables.

State and Local Anti-Predatory Lending Laws: The Effect of Legal Enforcement Mechanism (with Raphael W. Bostic et al.)   Abstract  
Journal of Economics and Business, Vol. 60, No. 1-2, January/February 2008, 47-66

Subprime mortgage lending has grown rapidly in recent years and with it, so have concerns about predatory lending. In response to evidence of predatory lending, most states have enacted new laws or expanded existing laws to address abuses in the subprime home loan market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context. Our results are consistent with the view that anti-predatory lending laws influence subprime lending markets and that disaggregating the details of the overall legal framework into its component parts is essential for understanding subprime market dynamics. The restrictions, coverage, and enforcement components all have significant relationships with subprime market outcomes, with the coverage relationship found to be broadly consistent with the reverse lemons hypothesis put forward by Ho and Pennington-Cross (2007). The results also suggest that the newer mini-HOEPA laws have had an impact on the subprime market above and beyond the older preexisting laws, particularly for subprime originations. Broader coverage through these new laws is associated with higher origination likelihoods, while increased restrictions through the mini-HOEPA laws are associated with lower origination propensities.

The American Mortgage in Historical and International Context (with Richard K. Green)   Abstract  
Journal of Economic Perspectives, Vol. 19, No.4, Fall 2005, 93-114

Home mortgages have loomed continually larger in the financial situation of American households. In 1949, mortgage debt was equal to 20 percent of total household income; by 1979, it had risen to 46 percent of income; by 2001, 73 percent of income (Bernstein, Boushey and Mishel, 2003). Similarly, mortgage debt was 15 percent of household assets in 1949, but rose to 28 percent of household assets by 1979 and 41 percent of household assets by 2001. This enormous growth of American home mortgages, as shown in Figure 1 (as a percentage of GDP), has been accompanied by a transformation in their form such that American mortgages are now distinctively different from mortgages in the rest of the world. In addition, the growth in mortgage debt outstanding in the United States has closely tracked the mortgage market’s increased reliance on securitization (Cho, 2004). The structure of the modern American mortgage has evolved over time. We begin by describing this historical evolution. The U.S. mortgage before the 1930s would be nearly unrecognizable today: it featured variable interest rates, high down payments and short maturities. Before the Great Depression, homeowners typically renegotiated their loans every year. We next compare the form of U.S. home mortgages today with those in other countries. The U.S. mortgage provides many more options to borrowers than are commonly provided elsewhere: American homebuyers can choose whether to pay a fixed or floating rate of interest; they can lock in their interest rate in between the time they apply for the mortgage and the time they purchase their house; they can choose the time at which the mortgage rate resets; they can choose the term and the amortization period; they can prepay freely; and they can generally borrow against home equity freely. They can also obtain home mortgages at attractive terms with very low down payments. We discuss the nature of the U.S. government intervention in home mortgage markets that has led to the specific choices available to American homebuyers. We believe that the unique characteristics of the U.S. mortgage provide substantial benefits for American homeowners and the overall stability of the economy.

Neighborhood Patterns of Subprime Lending Evidence from Disparate Cities (with Paul Calem and Jonathan E. Hershaff)   Abstract  
Housing Policy Debate, Vol.15, Issue 3, 2005

This paper estimates, for 7 cities, a model of prime versus subprime allocation of loans in 1997 and 2002 based on both individual loan and neighborhood attributes. The paper is directly interested in the effect of neighborhood racial and ethnic composition on the likelihood of receiving a subprime loan. The paper also allows for interaction of borrower race and ethnicity with neighborhood attributes. A unique feature of the paper is that it provides additional neighborhood controls for the aggregate level of credit risk and the neighborhood level of equity risk. The paper finds some evidence for tightening loan standards over the 5-year period in the subprime market. In both years, even with risk controls, the minority share of neighborhood is consistently significant and positively related to subprime share. Furthermore, neighborhood education level is consistently significant and negatively related to subprime lending.

The Neighborhood Distribution of Subprime Lending (with Paul S. Calem and Kevin Gillen)   Abstract  
Journal of Real Estate Finance and Economics, Vol. 29, Nol.4, December 2004, 393-410

Subprime lending in the residential mortgage market, characterized by relatively high credit risk and interest rates or fees, has developed over the past decade into a prominent segment of the market (Temkin (2000)). Recent research indicates that there is geographical concentration of subprime mortgages in Census tracts where there are high concentrations of low-income and minority households. The growth in subprime lending represents an expansion in the supply of mortgage credit among households who do not meet prime market underwriting standards. Nonetheless, its apparent concentration in minority and lower income neighborhoods has generated concerns that these households may not be obtaining equal opportunity in the prime mortgage market. Such lending may undermine revitalization to the extent that it is associated with so-called predatory practices.

Price Revelation and Efficient Mortgage Markets   Abstract  
Texas Law Review, Vol. 88, Issue 2, December 2003, 413-419

Over the past decade, the growth of the secondary market has produced an increased differentiation in the pricing of available capital for mortgage lending, as well as in the brokers and lenders involved in the distribution of mortgages. A major outcome of this shift is the emergence of subprime lenders. This paper provides commentary on the views of price revelation and efficient mortgage markets.

Community Reinvestment Portfolio and Credit Risk: Evidence from an Affordable Home Loan Program (with Paul S. Calem)   Abstract  
Real Estate Economics, Vol. 27, No.1, 1999

This study examines the performance of home purchase loans originated by a major depository institution in Philadelphia under a flexible lending program between 1988 and 1994. We examine long-term delinquency in relation to neighborhood housing market conditions, borrower credit history scores, and other factors. We find that likelihood of delinquency declines with the level of neighborhood housing market activity. Also, likelihood of delinquency is greater for borrowers with low credit history scores and those with high ratios of housing expense to income, and when the property is unusually expensive for the neighborhood where it is located.

Information Externalities and Home Mortgage Underwriting (with David C. Ling)
Journal of Urban Economics, Vol 44. 1998
What Do We Know about Discrimination in Financial Services
Journal of Financial Services Research, Vol. 11.1/2 1997, 205-208
Borrower and Neighborhood Racial and Income Characteristics and Financial Institution Mortgage Application Screening (with Michael L. Schill)   Abstract  
Journal of Real Estate Finance and Economics, Vol. 9.3, December 1994, 223-239

Disparities in mortgage lending patterns between minority and nonminority neighborhoods have refocused attention on the Community Reinvestment Act (CRA), a statute designed to encourage lending by financial institutions to nearby lower income neighborhoods. Geographic disparities may derive from discrimination, neighborhood and borrower attributes, as well as regulation itself. This article examines possible spatial impacts of the CRA. Tests for differential lender screening across regulated and nonregulated institutions in five metropolitan areas provide no consistent findings of regulatory effects. The article also tests whether lower income and minority applicants are more likely to be accepted when they apply for loans in lower income and minority neighborhoods. Using data for Boston, evidence is found for concentration effects that may result from institutional factors, information economies, or regulation.

Racial and Ethnic Disparities in Homeownership (with Isaac F. Megbolugbe)   Abstract  
Housing Policy Debate. Vol 3.2, 1992, 333-370

There are persistent differences in homeownership rates across racial and ethnic groups. Homeownership rates for whites are over 20 percentage points higher than for blacks or Hispanics. This paper uses a model of the housing tenure decision to gain a better understanding of these racial and ethnic differentials in homeownership and employs a decomposition technique that has been applied to labor market discrimination to report the results of the empirical testing of two hypotheses: (1) race (ethnicity) influences the probability of ownership through differences in household endowments (income, education, age, gender, and family type) and market endowments (price and location); and (2) race (ethnicity) directly influences the probability of ownership through racial or ethnic discrimination and other factors that may be correlated with race or ethnicity. We find endowment effects important in explaining the persistent racial and ethnic disparities in homeownership. In brief, logit analysis of 1989 American Housing Survey (AHS) national sample data reveals that 81 percent (78 percent) of the differences between the predicted probability of ownership between black and white households (Hispanic/non‐Hispanic) are due to differences in group endowments. Direct effects explain 19 percent of the black‐white differentials and 22 percent of the Hispanic/non‐Hispanic differentials. Because the direct effects are modeled as residual differences, it must be realized that the residual components could also be capturing the influence of important omitted or harder to measure variables internal to the market process and correlated with race or ethnicity. These include wealth, household location, employment history, credit history, and cultural predisposition toward homeownership.