Why Do Borrowers Default on Mortgages? a New Method for Causal Attribution Peter Ganong and Pascal J
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Mortgage-Default Research and the Recent Foreclosure Crisis
A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Foote, Christopher L.; Willen, Paul Working Paper Mortgage-default research and the recent foreclosure crisis Working Papers, No. 17-13 Provided in Cooperation with: Federal Reserve Bank of Boston Suggested Citation: Foote, Christopher L.; Willen, Paul (2017) : Mortgage-default research and the recent foreclosure crisis, Working Papers, No. 17-13, Federal Reserve Bank of Boston, Boston, MA This Version is available at: http://hdl.handle.net/10419/202908 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu No. 17-13 Mortgage-Default Research and the Recent Foreclosure Crisis Christopher L. Foote and Paul S. Willen Abstract: This paper reviews recent research on mortgage default, focusing on the relationship of this research to the recent foreclosure crisis. -
Expected Default Frequency
CREDIT RESEARCH & RISK MEASUREMENT EDF Overview FROM MOODY’S ANALYTICS MOODY’S ANALYTICS EDF™ (EXPECTED DEFAULT FREQUENCY) ASSET VOLATILITY CREDIT MEASURES A measure of the business risk of the firm; technically, the standard EDF stands for Expected Default Frequency and is a measure of the deviation of the annual percentage change in the market value of the probability that a firm will default over a specified period of time firm’s assets. The higher the asset volatility, the less certain investors (typically one year). “Default” is defined as failure to make scheduled are about the market value of the firm, and the more likely the firm’s principal or interest payments. value will fall below its default point. According to the Moody’s EDF model, a firm defaults when the market value of its assets (the value of the ongoing business) falls DEFAULT POINT below its liabilities payable (the default point). The level of the market value of a company’s assets, below which the firm would fail to make scheduled debt payments. The default point THE COMPONENTS OF EDF is firm specific and is a function of the firm’s liability structure. It is There are three key values that determine a firm’s EDF credit measure: estimated based on extensive empirical research by Moody’s Analyt- » The current market value of the firm (market value of assets) ics, which has looked at thousands of defaulting firms, observing each firm’s default point in relation to the market value of its assets » The level of the firm’s obligations (default point) at the time of default. -
Money Market Fund Glossary
MONEY MARKET FUND GLOSSARY 1-day SEC yield: The calculation is similar to the 7-day Yield, only covering a one day time frame. To calculate the 1-day yield, take the net interest income earned by the fund over the prior day and subtract the daily management fee, then divide that amount by the average size of the fund's investments over the prior day, and then multiply by 365. Many market participates can use the 30-day Yield to benchmark money market fund performance over monthly time periods. 7-Day Net Yield: Based on the average net income per share for the seven days ended on the date of calculation, Daily Dividend Factor and the offering price on that date. Also known as the, “SEC Yield.” The 7-day Yield is an industry standard performance benchmark, measuring the performance of money market mutual funds regulated under the SEC’s Rule 2a-7. The calculation is performed as follows: take the net interest income earned by the fund over the last 7 days and subtract 7 days of management fees, then divide that amount by the average size of the fund's investments over the same 7 days, and then multiply by 365/7. Many market participates can use the 7-day Yield to calculate an approximation of interest likely to be earned in a money market fund—take the 7-day Yield, multiply by the amount invested, divide by the number of days in the year, and then multiply by the number of days in question. For example, if an investor has $1,000,000 invested for 30 days at a 7-day Yield of 2%, then: (0.02 x $1,000,000 ) / 365 = $54.79 per day. -
The Determinants of Attitudes Towards Strategic Default on Mortgages∗
June 2011 The Determinants of Attitudes towards Strategic Default on Mortgages∗ Luigi Guiso European University Institute, EIEF, & CEPR Paola Sapienza Northwestern University, NBER, & CEPR Luigi Zingales University of Chicago, NBER, & CEPR Abstract We use survey data to measure households’ propensity to default on mortgages even if they can afford to pay them (strategic default) when the value of the mortgage exceeds the value of the house. The willingness to default increases both in the absolute and in the relative size of the home- equity shortfall. Our evidence suggests that this willingness is affected both by pecuniary and non- pecuniary factors, such as views about fairness and morality. We also find that exposure to other people who strategically defaulted increases the propensity to default strategically because it conveys information about the probability of being sued. ∗ An earlier version of this paper circulated with the title “Moral and Social Constraints to Strategic Default on Mortgages.” We would like to thank the University of Chicago Booth School of Business and Kellogg School of Management for financial support in establishing and maintaining the Chicago Booth Kellogg School Financial Trust Index. Luigi Guiso is grateful to PEGGED for financial support. We thank Campbell Harvey (editor), Amir Sufi, two anonymous referee and seminar participants at the University of Chicago and New York University for very useful suggestions, Gabriella Santangelo and Filippo Mezzanotti for excellent research assistantship, and Peggy Eppink for editorial help. We also thank Amit Seru for providing us with a time series of actual strategic default within his sample. 1 In 2009, for the first time since the Great Depression, millions of American households found themselves with a mortgage that exceeded the value of their home. -
The Student Loan Default Trap Why Borrowers Default and What Can Be Done
THE STUDENT LOAN DEFAULT TraP WHY BORROWERS DEFAULT AND WHAT CAN BE DONE NCLC® NATIONAL CONSUMER July 2012 LAW CENTER® © Copyright 2012, National Consumer Law Center, Inc. All rights reserved. ABOUT THE AUTHOR Deanne Loonin is a staff attorney at the National Consumer Law Center (NCLC) and the Director of NCLC’s Student Loan Borrower Assistance Project. She was formerly a legal services attorney in Los Angeles. She is the author of numerous publications and reports, including NCLC publications Student Loan Law and Surviving Debt. Contributing Author Jillian McLaughlin is a research assistant at NCLC. She graduated from Kala mazoo College with a degree in political science. ACKNOWLEDGMENTS This report is a release of the National Consumer Law Center’s Student Loan Borrower Assistance Project (www.studentloanborrowerassistance.org). The authors thank NCLC colleagues Carolyn Carter, Jan Kruse, and Persis Yu for valuable comments and assistance. We also thank Emily Green Caplan for research assistance as well as NCLC colleagues Svetlana Ladan and Beverlie Sopiep for their assistance. We also thank the amazing advocates who helped out by surveying their clients, including Herman De Jesus and Liz Fusco with Neighborhood Economic Development Advo cacy Project and Meg Quiat, volunteer attorney at Boulder County Legal Services. This report is grounded in and inspired by the author’s work with lowincome clients. The findings and conclusions in this report are those of the author alone. NCLC’s Student Loan Borrower Assistance Project provides informa tion about student loan rights and responsibilities for borrowers and advocates. We also seek to increase public understanding of student lending issues and to identify policy solutions to promote access to education, lessen student debt burdens, and make loan repayment more manageable. -
UK Landlord Strategic Default and Negotiation Options
Valuing Changes in UK Buy-To-Let Tax Policy on a Landlord’s Strategic Default and Negotiation Options. Michael Flanagan* Manchester Metropolitan University, UK Dean Paxson** University of Manchester, UK February 10, 2016 JEL Classifications: C73, D81, G32 Keywords: Tax Policy, Property, Negotiation, Default, Options, Capital Structure, Games. *MMU Business School, Centre for Professional Accounting and Financial Services, Manchester, M1 3GH,UK. [email protected]. +44 (0) 1612473813. Corresponding Author. **Manchester Business School, Manchester, M15 6PB, UK. [email protected]. +44 (0) 1612756353. Valuing Changes in UK Buy-To-Let Tax Policy on a Landlord’s Strategic Default and Negotiation Options. Abstract We extend the commonly valued strategic default option by proposing and developing a strategic renegotiation option, where we assume an instantaneous renegotiation between a lender and a UK landlord triggered by a declining rental income. We ignore the prepayment option given that UK interest rates are unlikely to lower in the medium term. We then investigate how a reduction in mortgage tax relief might differentially affect the optimal acquisition threshold and the exercise of the default or renegotiation options. We model the renegotiations by considering the sharing of possible future unavoidable foreclosure costs in a Nash bargaining game. We derive closed form solutions for the optimal loan terms, such as LTV (Loan To Value) and the coupon offered by the lender to a landlord. We demonstrate that the ability of either party to negotiate a larger share of unavoidable foreclosure costs in one’s favour has a significant influence on the timing of the optimal ex post negotiation decision, which will invariably precede strategic default. -
Default Option Exercise Over the Financial Crisis and Beyond*
Review of Finance, 2021, 153–187 doi: 10.1093/rof/rfaa022 Advance Access Publication Date: 17 August 2020 Default Option Exercise over the Financial Crisis and beyond* Downloaded from https://academic.oup.com/rof/article/25/1/153/5893492 by guest on 19 February 2021 Xudong An1, Yongheng Deng2, and Stuart A. Gabriel3 1Federal Reserve Bank of Philadelphia, 2University of Wisconsin – Madison, and 3University of California, Los Angeles Anderson School of Management Abstract We document changes in borrowers’ sensitivity to negative equity and show height- ened borrower default propensity as a fundamental driver of crisis period mortgage defaults. Estimates of a time-varying coefficient competing risk hazard model reveal a marked run-up in the default option beta from 0.2 during 2003–06 to about 1.5 dur- ing 2012–13. Simulation of 2006 vintage loan performance shows that the marked upturn in the default option beta resulted in a doubling of mortgage default inci- dence. Panel data analysis indicates that much of the variation in default option ex- ercise is associated with the local business cycle and consumer distress. Results also indicate elevated default propensities in sand states and among borrowers seeking a crisis-period Home Affordable Modification Program loan modification. JEL classification: G21, G12, C13, G18 Keywords: Mortgage default, Option exercise, Default option beta, Time-varying coefficient hazard model Received August 19, 2017; accepted October 23, 2019 by Editor Amiyatosh Purnanandam. * We thank Sumit Agarwal, Yacine Ait-Sahalia, -
Essays in Macroeconomics
University of Pennsylvania ScholarlyCommons Publicly Accessible Penn Dissertations 2018 Essays In Macroeconomics David Zarruk Valencia University of Pennsylvania, [email protected] Follow this and additional works at: https://repository.upenn.edu/edissertations Part of the Economics Commons Recommended Citation Zarruk Valencia, David, "Essays In Macroeconomics" (2018). Publicly Accessible Penn Dissertations. 2940. https://repository.upenn.edu/edissertations/2940 This paper is posted at ScholarlyCommons. https://repository.upenn.edu/edissertations/2940 For more information, please contact [email protected]. Essays In Macroeconomics Abstract This dissertation is composed of three chapters. In the first two chapters, I study the welfare and distributional consequences of government policies in economies with credit constraints and heterogeneous agents. Given the complexity to compute such models, the third chapter reviews the basics of parallel computing in macroeconomics. In the first chapter, I quantitatively assess the welfare maximizing policy during the Great Recession, when the government had access to two policy instruments: a) offer bailouts to banks, and b) subsidize the mortgage refinancing of households. The implementation of these instruments involves a trade-off, shaped by a dead-weight loss caused by foreclosures and an information friction on house prices. The main finding is that a subsidy-only policy would have generated welfare gains of up to 0.4% in consumption equivalent terms when compared to the HAMP and TARP benchmark. In the second chapter, I study the general equilibrium effects of government-supplied student loans in the educational markets of developing countries. Our main finding suggests that subsidized student loans can lead to a widening gap in the quality of education offered by top-10 versus top-50 educational institutions. -
What Do One Million Credit Line Observations Tell Us About Exposure at Default? a Study of Credit Line Usage by Spanish Firms
What Do One Million Credit Line Observations Tell Us about Exposure at Default? A Study of Credit Line Usage by Spanish Firms Gabriel Jiménez Banco de España [email protected] Jose A. Lopez Federal Reserve Bank of San Francisco [email protected] Jesús Saurina Banco de España [email protected] DRAFT…….Please do not cite without authors’ permission Draft date: June 16, 2006 ABSTRACT Bank credit lines are a major source of funding and liquidity for firms and a key source of credit risk for the underwriting banks. In fact, credit line usage is addressed directly in the current Basel II capital framework through the exposure at default (EAD) calculation, one of the three key components of regulatory capital calculations. Using a large database of Spanish credit lines across banks and years, we model the determinants of credit line usage by firms. We find that the risk profile of the borrowing firm, the risk profile of the lender, and the business cycle have a significant impact on credit line use. During recessions, credit line usage increases, particularly among the more fragile borrowers. More importantly, we provide robust evidence of more intensive use of credit lines by borrowers that later default on those lines. Our data set allows us to enter the policy debate on the EAD components of the Basel II capital requirements through the calculation of credit conversion factors (CCF) and loan equivalent exposures (LEQ). We find that EAD exhibits procyclical characteristics and is affected by credit line characteristics, such as commitment size, maturity, and collateral requirements. -
Nber Working Papers Series
NBER WORKING PAPERS SERIES WAS THERE A BUBBLE IN THE 1929 STOCK MARKET? Peter Rappoport Eugene N. White Working Paper No. 3612 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 1991 We have benefitted from comments made on earlier drafts of this paper by seminar participants at the NEER Summer Institute and Rutgers University. We are particularly indebted to Charles Calomiris, Barry Eicherigreen, Gikas Hardouvelis and Frederic Mishkiri for their suggestions. This paper is part of NBER's research program in Financial Markets and Monetary Economics. Any opinions expressed are those of the authors and not those of the National Bureau of Economic Research. NBER Working Paper #3612 February 1991 WAS THERE A BUBBLE IN THE 1929 STOCK MARKET? ABSTRACT Standard tests find that no bubbles are present in the stock price data for the last one hundred years. In contrast., historical accounts, focusing on briefer periods, point to the stock market of 1928-1929 as a classic example of a bubble. While previous studies have restricted their attention to the joint behavior of stock prices and dividends over the course of a century, this paper uses the behavior of the premia demanded on loans collateralized by the purchase of stocks to evaluate the claim that the boom and crash of 1929 represented a bubble. We develop a model that permits us to extract an estimate of the path of the bubble and its probability of bursting in any period and demonstrate that the premium behaves as would be expected in the presence of a bubble in stock prices. -
Understanding Default and Foreclosure
WISCONSIN HOMEOWNERSHIP PRESERVATION EDUCATION Understanding Default & Foreclosure Understanding Default and Foreclosure Section Overview Overview and Goals Foreclosure is the legal process in which a person who has made What is Default? Dealing with default a mortgage (the mortgagor or borrower) in order to borrow Outcomes of Default money loses his or her rights to the mortgaged property. If the Short term problems borrower fails to make payment at the proper time or fails to Repayment agreement meet other obligations specified in the bond or mortgage, the Modification foreclosure process begins. The lender applies to a court for Forbearance authority to sell the property. Money received from a sale is Partial or advance claim applied to debts on the property, including payments due to the Reverse equity mortgage lender. Refinance Long term problems The costs related to foreclosure can be high for both families and Sale of property Hardship assumption communities. Missed payments are generally reflected in credit Pre‐foreclosure/ short sale reports, which can impair a borrower’s ability to use short‐term Deed‐in‐lieu loans. Borrowers who lose their homes to foreclosure or seek Foreclosure bankruptcy may then have severely damaged credit records, The Legal Process of Foreclosure which will restrict their access to loans in the future. In addition, Where to go? these borrowers suffer financial losses on the home. Preparing to call your lender Documents you’ll need Foreclosure can also have negative social and emotional impacts Supplemental materials on families as they lose their home and are forced to move. The Homeowner Affordability and impacts related to foreclosure also spill over into neighboring Stability Plan Additional Resources areas. -
Landlord Use of Llcs and Housing Code Enforcement
YALE LAW & POLICY REVIEW Code Dodgers: Landlord Use of LLCs and Housing Code Enforcement By James Horner* In depressed real estate markets across the United States, landlords are placing each of their properties in separate LLCs. Their aim in doing so is to avoid the full brunt of housing code enforcement by limiting their exposure to potential fines. The increasing prevalence of single‐property LLCs has significant, negative consequences for low‐ income tenants. First, their buildings are less likely to be well maintained. Additionally, in certain circumstances, a single‐property LLC strategy enables landlords to use superior bargaining power to extract enormous profits from tenants in dilapidated properties. Then, when the property accumulates too many fines, landlords can simply walk away from the buildings. This, in turn, increases blight and reduces the affordable housing stock in a city. Current legal schemes—such as typical housing codes, criminal penalties, and consumer protections—do not adequately address this problem. Instead, this Note recommends that local governments pursue a policy of limited corporate veil piercing for landlords based on ERISA’s common control liability provisions. This scheme would prevent landlords from evading full liability for housing code violations. INTRODUCTION ....................................................................................................................... 648 I. LANDLORD LLC USE AND ITS CONSEQUENCES ............................................................. 652 * J.D. Candidate, Yale Law School, expected 2019. I am deeply grateful to Jay Pottenger for his wisdom and tireless efforts in providing feedback on earlier drafts of this Note. I also thank the Yale Housing Clinic, the Hon. Jeffrey M. Winik, Housing Court of Massachusetts, and Vicki Been for their input and suggestions. Finally, I am indebted to the editors of the Yale Law & Policy Review—especially Stephanie Garlock, Allaya Lloyd, and Simon Zhen for their hard work and thoughtful comments.