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Abstract:
One of the major developments in real estate finance during the 1990s was the emergence of a viable market for commercial mortgage backed securities. The growth in this market has spurred greater interest in empirical and theoretical research on commercial mortgage default and prepayment. We employ a competing risks model to examine the default and prepayment behavior of commercial loans underlying CMBS deals. We find that changes in the yield curve have a direct impact on the probability of mortgage termination. Furthermore, we do not find any statistical relationship between LTV and prepayment or default.

commercial mortgage-backed securities, competing risks, prepayment, default

Abstract:
One of the major developments in real estate finance during the 1990s was the emergence of a viable market for commercial mortgage backed securities. The growth in this market has spurred greater interest in empirical and theoretical research on commercial mortgage default and prepayment. We employ a competing risks model to examine the default and prepayment behavior of commercial loans underlying CMBS deals. We find that changes in the yield curve have a direct impact on the probability of mortgage termination. Furthermore, we do not find any statistical relationship between LTV and prepayment or default.

Commercial Mortgage-backed Securities, Competing Risks, Prepayment, Default

Abstract:
The magnitude of the effect of government-sponsored enterprise purchases on primary mortgage market rates has been a difficult research question to answer with differing data and competing methodologies producing different results. In this paper we present a new approach using loan level data and controlling for any credit risk differential between conforming and non-conforming loans. Our method also addresses econometric problems of endogeneity and sample selection bias. We find that conforming loans have yields spread about 2.6% lower (4.5 basis points) on a risk-adjusted basis compared to other loans. This is lower than previous estimates appearing in the literature and may result from the greater precision available in our loan level dataset that allows us to control for credit risk.

Mortgage yield spreads, securitization, government-sponsored enterprise

Abstract:
Loss mitigation is the process by which lenders attempt to minimize losses associated with foreclosure. As competition increases in the mortgage industry, lenders and servicers are under great pressure to adopt loss mitigation tactics rather than simply use foreclosure as the means of dealing with borrowers in default. However, to date, no study has examined the impact of loss mitigation programs on borrower behavior. This study presents a mortgage pricing model that fully specifies all borrower options with respect to default, including the ability to reinstate the mortgage out of default. This model documents the impact of various loss mitigation programs, including forbearance and anti-deficiency judgments, on borrower behavior. We also explicitly consider the impact of the value of credit on borrower default behavior.

Abstract:
Banks face the choice of keeping loans on their balance sheet as private debt or transforming them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still choose to retain a portion of their loans in portfolio. An open research question is whether lenders exploit asymmetric information to sell riskier loans into the public markets or retain riskier loans in response to regulatory capital incentives (regulatory capital arbitrage). We examine this question empirically using micro-level data and find that securitized mortgage loans have experienced lower ex-post defaults than those retained in portfolio, providing evidence consistent with the latter explanation for securitization.

Banks, debt, securitization, regulatory capital

Abstract:
Given the growth in home equity lending during the 1990s, it is imperative that lenders and regulators understand the risks associated with this segment of the residential mortgage market. Using a unique panel data set of over 135,000 homeowners with second mortgages, our analysis indicates that significant differences exist in the prepayment and default probabilities of home equity loans and lines, providing insights into bank minimum capital requirements. We find that households with equity loans are relatively more sensitive to changes in interest rates. By contrast, households with equity lines are more sensitive to appreciation in property value.

Home Equity Loans and Lines, Prepayment, Capital Regulations

Abstract:
Given the growth in home equity lending during the 1990s, it is imperative that lenders and regulators understand the risks associated with this segment of the residential mortgage market. This paper addresses this need through analysis of a unique panel data set of over 135,000 homeowners with second mortgages. Our analysis indicates that significant differences exist in the prepayment and default probabilities of home equity loans and lines. We find that households with equity loans are relatively more sensitive to changes in interest rates. On the other hand, households with equity lines are more sensitive to appreciation in property value. Our analysis offers insights into bank minimum capital requirements associated with home equity credit lending.

Home Equity Loans and Lines, Prepayment, Capital Regulations

Abstract:
This study examines the pricing of high-LTV debt to determine whether state-specific default laws have an impact on the availability and cost of that debt. We develop a simple theoretical model that provides predictions concerning borrower and lender choice of mortgage terms under differing assumptions regarding state default regulations. We examine whether lenders rationally price loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that lenders rationally price loans to higher risk borrowers for the most part; however, when we focus on smaller and smaller FICO scores buckets, the results indicate that the mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws do have an impact on the price of credit. The results also show that there is a greater degree of error in the pricing of high LTV loans to low FICO borrowers than to high FICO borrowers.

Credit risk, high LTV, loan-to-value, mortgage

Abstract:
This study examines the pricing of high-LTV debt to determine whether state-specific default laws have an impact on the availability and cost of that debt. We develop a simple theoretical model that provides predictions concerning borrower and lender choice of mortgage terms under differing assumptions regarding state default regulations. We examine whether lenders rationally price loans to higher risk borrowers and whether borrowers in states that limit lender ability to seek default remedies pay higher credit costs. Our results indicate that lenders rationally price loans to higher risk borrowers for the most part; however, when we focus on smaller and smaller FICO scores buckets, the results indicate that the mean actual loan rates are higher than those predicted by our model. The results also indicate that state-specific default laws do have an impact on the price of credit. The results also show that there is a greater degree of error in the pricing of high LTV loans to low FICO borrowers than to high FICO borrowers.

credit risk, high LTV, loan-to-value, mortgage

Abstract:
This paper examines the long run relation between prices and rents for houses in Amsterdam from 1650 through 2005. We first demonstrate that these series are cointegrated, a necessary condition for studying movements of the rent-price ratio. We then estimate the deviation of house prices from fundamentals and find that these deviations can be persistent and long-lasting. Lastly, we look at the feedback mechanisms between housing market fundamentals and prices, and find that market correction of the mispricing occurs mainly through prices not rents. This correction back to equilibrium, however, can take decades.

house prices, rents, fundamentals, bubbles

Abstract:
This study considers the case of two overlapping categories in the context of recent category models. Specifically, we examine whether investor sentiment and market frictions specific to one category can affect the returns on assets belonging to the other category. With recent additions of several real estate investment trusts (REITs) into general stock market indices as a natural experiment, we find support for spillovers of such nonfundamental effects, as evidenced by the increased return correlation between REITs that remain outside the index and the index stocks. Further analysis reveals that market frictions play a greater role than investor sentiment.

Abstract:
This study considers the case of two overlapping categories in the context of recent category models. Specifically, we examine whether investor sentiment and market frictions specific to one category can affect the returns on assets belonging to the other category. With recent additions of several real estate investment trusts (REITs) into general stock market indices as a natural experiment, we find support for spillovers of such nonfundamental effects, as evidenced by the increased return correlation between REITs that remain outside the index and the index stocks. Further analysis reveals that market frictions play a greater role than investor sentiment.

category model, spillover effect, REITs, stock market index

Abstract:
We extend the work of Ambrose and LaCour-Little (2001) on traditional one-year adjustable rate mortgages by analyzing the performance of 3/27 hybrid instruments. Under this contract innovation, which first appeared in the mid-1990s, note rates are fixed for three years after which they convert to a traditional one-year adjustment schedule. We find high rates of prepayment, particularly at time of initial rate adjustment, and relatively high rates of default, as would be consistent with the payment shock that often affects adjustable rate loans.

adjustable rate mortgage, prepayment, default

Abstract:
Adjustable rate mortgages (ARMs), which allows mortgagees to adjust the contracted interest rate to market interest rate at agreed intervals, are the prevailing type of mortgage in Singapore and many Asian countries. Analyzing the default risks in ARMs is difficult because of the path-dependence of the mortgage interest rates. The pricing process for the defaultable ARMs is even more complicated when applied to Singapore housing market, where the use of the Central Provident Fund (CPF) savings and monthly contributions to supplement the housing purchase are indispensable in the home financing system. The paper models the mortgage default options in ARMs taking into consideration the special settings of CPF system, and evaluates the impact of how changes to CPF withdrawal rules will have impact on the mortgage default risks. Numerical analyses are conducted using the least square Monte Carlo simulation, and the results show an inverse relationship between the withdrawal cap and default risk premiums in ARMs. When the withdrawal cap is tightened from 150% to 120% of the original house price, default risk premiums increase from 0.42% to 0.86 for the mortgagor; and from 1.10% to 1.51% for the mortgagee. We also observed that the CPF saving interest rates, the house price volatility and interest rate volatility are positively related to the default option premiums in ARMs.

Adjustable rate mortgage, Mortgage default option, CPF withdrawal limit

Abstract:
The authors examine whether a borrower's choice of automobile reveals information about future loan performance. They find that loans on most luxury automobiles have a higher probability of prepayment, while loans on most economy automobiles have a lower probability of default, even when holding traditional risk factors, such as income and credit score, constant.

consumer debt, auto loans, household finance, prepayment, default, Financial Institutions and Services, Duration Analysis, Personal Finance, Asymmetric and Private Information

Abstract:
We analyze more than 108,000 home equity loans and lines of credits to study the role of information asymmetry in a credit market where borrowers face a menu of contract options and a lender uses a counteroffer to further mitigate contract frictions. Our results reveal that a less credit-worthy applicant is more likely to select a credit contract that requires less collateral. Further analysis on borrower repayment behavior ex post indicates that the lender may face adverse selection due to private information, controlling for observable risk attributes. We also find that systematic screening ex ante by a lender to mitigate contract frictions can effectively reduce overall credit losses ex post.

Asymmetric Information, Contract Frictions, Screening, Banking, Home Equity Lending

Abstract:
Previous empirical research has attempted to quantify the extent of price pressure when major quantities of a security are sold or bought, but most studies suffer from the fact that the unusually large sales or purchases involve information effects as well. We examine forced selling of fallen angel bonds by insurance companies to estimate price pressure effects. We restrict our sample of downgraded bonds to include only firms whose stock has no significant reaction to the downgrade, making the sale of these fallen angels far more likely to merely represent regulatory pressure to dispose of junk bonds. Once we control for information, we find that price pressure effects are negligible, if not non-existent. To the extent that any price pressure effects show up in these bond sales, they ought to be greater for illiquid bonds. We do not find that bond liquidity explains the variation in bond returns in our information-free sample, further supporting our contention that price pressure is not a major factor in security pricing.

price pressure, liquidity, fallen angel bonds, insurance companies

Abstract:
This paper investigates the interaction between stock price movement and REIT earnings management. We examine whether information generated from stock trading influences managers' incentives to engage in earnings management. We first test if stock investors are able to detect earnings management by examining whether REITs that are suspected of engaging in earnings management have fundamental values less closely tracked by their stock prices. Consistent with the efficient markets hypothesis, we find that suspected earnings-management firms do not appear to be more mispriced than others. We further inquire into the feedback effect of stock market trading activity on earnings management. Using idiosyncratic volatility as a measure of private information embedded in stock price, we find that negative real earnings management, which allows REITs to circumvent the mandatory dividend payout requirement, is associated with greater information embedded in REIT stock prices. Our result implies that information contained in stock price volatility motivates REIT managers to more actively avoid regulatory costs.

REIT, Earnings, Market Efficiency

Abstract:
This paper focuses on the defaultable lease rate term structure with endogenous default. We combine the competitive lease market argument proposed by Grenadier (1996) and the endogenous default structural model proposed by Leland and Toft (1996) to examine the interaction between lessee's captial structure and the equilibrium lease rate. Under this framework, determining the lease rate is a simultaneous equation problem that captures the tradeo® between debt and lease financing. Using data on 2,482 real estate lease transactions, we empirically confirm the predictions derived from the numerical analysis of the model.

leasing valuation, credit risk, endogenous default

Abstract:
We propose a new mortgage contract that endogenizes the risk of house price declines and thus minimizes default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed-rate mortgage. Our new mortgage recognizes that the lender is the most economically efficient bearer of house price risk. By reducing the role of the legal system in mitigating house price risk, the new mortgage reduces the negative externalities and social costs arising from defaults resulting from house price risk. In other words, the new mortgage minimizes the need to use the legal foreclosure system to deal with the economic risk of house price declines.

Mortgage Default, Foreclosure, Modification

Abstract:
This paper presents a stochastic pricing model of a unique, path-dependent lease instrument common in the United Kingdom and numerous commonwealth countries, the upward-only adjusting lease. In this lease, the rental rate is fixed at lease commencement but will be reset to the market rate at predetermined intervals (usually every five years) if it exceeds the contract rent. We derive a closed form expression for the market rent of a lease with upward-only adjustments. Results indicate what the initial coupon rate on a 10-year lease with one reset should be relative to that on a symmetric up-and-downward adjusting "variable rate" lease under various economic conditions (level of real interest rates and expected drift and volatility of the underlying rental service flow). We also consider the calculation of effective rents when free rent periods are given.

leases, real options, effective rents

Abstract:
This paper presents a stochastic pricing model of a unique, path-dependent lease instrument common in the United Kingdom and numerous commonwealth countries, the upward-only adjusting lease. In this lease, the rental rate is fixed at lease commencement but will be reset to the market rate at predetermined intervals (usually every five years) if it exceeds the contract rent. Numerical results indicate how the initial coupon rate should be set relative to that on a symmetric up-and-downward adjusting variable rate' lease under various economic conditions (level of real interest rates and expected drift and volatility of the underlying rental service flow). We also consider the calculation of effective rents when free rent periods are given during either a market collapse or a steady-state drift.

Abstract:
We examine the effect of direct mail (commonly referred to as junk mail) advertising on individual financial decisions by studying consumer choice of home equity debt contracts. Consistent with the theoretical predictions, we find that financial variables underlying the relative pricing of debt contracts are the leading factors explaining consumers home equity debt choice. Furthermore, we also find that the intended use of debt proceeds significantly impacts consumer choice. However, when we study a subset of consumers who received a direct mail solicitation for a particular debt contract (fixed versus adjustable-rate), we find evidence that the relative pricing variables are less relevent in explaining consumer contract choice, even though they were presented with a full menu of debt contracts. Thus, our results are consistent with the persuasive view of advertising.

Persuasion, Advertising, Contract Choice, Home-equity Lending

Abstract:
We investigate the role of disruptions to the structure of the homebuilding industry due to fluctuations in the availability of bank credit. We find a sustained decline in the large private homebuilder market share series over the period from 1988 to 1993 when many banks with deteriorated health reduced their lending in order to raise capital ratios. Regression analysis at the metropolitan statistical area level supports the hypothesis that, in areas where banks were less well capitalized and had more problem construction loans, the market shares of large private homebuilders that relied primarily on bank credit to finance their production suffered at the expense of the public homebuilders that had better access to external funds, in large part due to their direct access to public capital markets.

Abstract:
Equity marginal q is the change in the market value of a company's equity in response to a one-unit unexpected change in its asset base. Hence, it is a profitability index that evaluates a firm's capital budgeting decisions at the margin. We estimate the equity marginal q for real estate–managing public corporations, namely, real estate investment trusts (REITs), in an attempt to understand how the various costs and benefits of being a public corporation play a role in managing this important asset class. Using the universe of equity REITs for the period from 1993 to 2005, we find that REITs with greater idiosyncratic volatility, higher stock turnover and smaller bid-ask spread have a higher equity marginal q. In addition, both the holdings of institutional investors and their investment horizons are respectively positively related to equity marginal q. With these firm characteristics taken into account, firm size is found to be negatively related to equity marginal q. Our findings are economically important as well, because the equity marginal q ratio alone accounts for approximately one-third of the total REIT shareholder wealth change during the study period.

Abstract:
Previous research either assumes default free leases or leases subject to default risk using a structural approach. However, structural credit risk models suffer from a common criticism that the firm's asset value process is unobservable. We develop a reduced form credit risk model for leases that avoids making assumptions regarding unobservable asset valuation processes. Furthermore, we assume a correlated market and credit risk that provides us with a simple analytic formula for valuing defaultable lease contracts. Numerical analysis reveals that tenant credit risk can have a substantial impact on the term structure of leases. Finally, we use the model to demonstrate the implied lease term structure for a set of retail and financial firms in the Fall of 2000.

leasing valuation, credit risk, reduced form model

Abstract:
Information revelation can occur in a variety of ways. For example, in the home mortgage market, borrowers reveal their expected house tenure through their choice of mortgage contracts. As a result, lenders offer a menu of mortgage interest rate and point combinations in an effort to learn private information about borrowers' potential mobility. This paper uses a unique dataset of individual automobile loan performance to assess whether borrower consumption choice reveals information about future loan performance. Results indicate that the automotive make and model a consumer selects provides information about the loan's performance - that is, we observe differential loan performance after we control for borrower characteristics. The results from this study suggest that lenders, instead of charging a house-rate for all auto loans, could profitably pursue risk-based pricing based on the type of car the borrower purchases.

Consumer debt, consumption decisions, prepayment, default

Abstract:
While much is known about the characteristics of consumers or businesses that obtain credit lines, relatively little is known empirically about credit line utilization after origination. This study fills that gap by testing two interrelated hypotheses concerning borrower credit quality and credit line utilization. The empirical analysis confirms that borrowers with higher expectations of future credit quality deterioration originate credit lines to preserve financial flexibility. Furthermore, we estimate a competing risks model that confirms our predictions concerning changes in borrower credit line utilization in response to borrower credit quality shocks.

Home equity lines, prepayment, banks

Abstract:
This paper examines the distortions in property markets resulting from government actions to alleviate externalities associated with vacant lots. Using an equilibrium based real option model, the analysis indicates that announcement of a program of forced development may actually delay market-based development. By incorporating externalities associated with vacant lots into the model, the analysis indicates that owners of neighboring developed property benefit suggesting such programs will be politically popular.

Real Options, Development, Government Intervention

Abstract:
This paper examines the degree of integration between rural and metropolitan mortgage markets and addresses three fundamental questions regarding the rural mortgage market. First, does a jumbo/conforming loan rate differential exist in the rural mortgage market, and if so, to what extent do Fannie Mae and Freddie Mac contribute to lowering rural conforming mortgage rates? Second, to what extent are rural and urban mortgage markets integrated? Third, what risk factors contribute to changes in rural and urban mortgage credit spreads? The results from our analysis confirm that the conforming rural market is closely tied to the conforming urban market, while the jumbo rural market is less closely tied to the jumbo urban market. We interpret this as evidence that GSE involvement in the rural market, while a relatively small portion of the overall GSE business, is, nevertheless, serving to provide rural conforming mortgage borrowers with improved access to credit, especially when compared to rural jumbo borrowers.

Government Sponsored Enterprise, mortgage markets

Abstract:
This paper develops an equilibrium model of the commercial mortgage market that includes the sequence form commitment to origination and allows testing for differences by type of lender. From borrowers, loan demand is based on the income yield, capital gains, and expectations about return distributions. Lenders use prices such as mortgage rates and their distributions, and quantities in underwriting standards. There are separate equilibria in the markets for loan commitments and originations. Bank and nonbank lenders are not restricted to the same lending technology, nor to the weights placed on mortgage rates as opposed to underwriting standards. Empirical results for the United States commercial mortgage market indicate that banks use interest rates in allocating credit while nonbanks rely on underwriting standards, notably the loan-to-value ratio. A consequence is that nonbanks have a clientele incentive towards making low cap rate loans compensated by low loan-to-value ratios.

commercial mortgages, bank lending, underwriting standards, loan commitments, origination, credit allocation, loan-to-value ratio

Abstract:
Implicit in option-pricing models of mortgage valuation are threshold levels of put-option value that must be crossed to induce borrower default. There has been little research into what these threshold values are that come out of pricing models, or how they compare to exercised option values seen in empirical data. This study decomposes boundary conditions for optimal default exercise to look at the economic dynamics that should lead to optimal default timing. Empirical data on FHA insured mortgage foreclosures is then examined to discern the predictive influence of optimal-option-valuation-and-exercise variables on observed default timing and values. Interesting results include a new understanding of how to measure and use property equity variables during economic downturns, house price index ranges over which default is exercised for various classes of borrowers, and implied differences in appreciation rates between market price indices and foreclosed properties.

mortgage default, loss severity, foreclosure

Abstract:
As the size of Government Sponsored Enterprises (GSE) has grown, attention has focused on the relationship between the federal government and the GSEs, with particular attention focused on estimating the impact of this relationship on GSE debt costs. Quantifying the GSEs' cost advantage is a controversial exercise with several competing methodologies providing divergent values. Thus, this paper reviews the methods that have been utilized in previous studies and recommends an alternative approach that overcomes many of the criticisms of previous work. By using offering yields on GSE debt, we find that the three housing GSEs cost advantage is a controversial exercise with several competing methodologies providing divergent values. Thus, this paper reviews the methods that have been utilized in previous studies and recommends an alternative approach that overcomes many of the criticisms of previous work. By using offering yields on GSE debt, we find that the three housing GSEs enjoyed an average advantage of between 25 and 29 basis points over "AA" banking sector bonds, between 43 and 47 basis points over "A" rated bonds, and between 76 issues. We find that our results are robust to both the basic approach taken as well as to model specification.

government sponsored enterprises, yield spreads

Abstract:
This paper uses house-price transaction data to estimate volatility in house prices. The volatility parameter is an input into a mortgage-pricing model that is used to simulate the contract interest rate that balances the mortgage contract. By segmenting the house-price transactions into high- and low-valued homes, we are able to estimate a theoretical jumbo/conforming loan rate differential. Simulation results demonstrate that the differences in volatility between high- and low-priced homes can produce a contract loan rate differential, holding all else constant. The paper also presents a discussion of the problems inherent to estimating volatilities from assets with infrequent trades and long holding periods.

Mortgages, Government Sponsored Enterprises, Mortgage Rate Spreads, House Price Volatility

Abstract:
The real estate industry has recently witnessed significant and pervasive consolidation with further growth and consolidation generally viewed as a foregone conclusion. For example, between 1990 and 1997, growth in average net real estate investments by large REITs outpaced growth in average net real estate investments by small REITs by 13 percent. However, no systematic study of the benefits of this consolidation exists. This research studies whether or not there are gains to consolidation due to economies of scale from size, brand imaging, and informational gains from geographic specialization. Our sample consists of 41 multifamily equity REITs, for whom finanical and property level data are available in the SNL REIT Database. Using this data, we construct 'shadow' portfolios that mimic each REIT's exposure to changes in local market conditions. Our results show no size economies, that branding in real estate is allusive, and that geographic specialization, in agreement with Gyourko and Nelling (1993), has no significant benefit.

REITs, Economies of Scale

Abstract:
This paper empirically examines several open questions regarding prepayment risk in adjustable rate mortgages (ARMs), using loan-level data. Results support the teaser rate and adjustment date effects implied by the theoretical option pricing model of Kau, Keenan, Epperson and Muller (1993). In addition, we find that deeply teased ARMs do have greater prepayment risk, contrary to the results of Green and Shilling (1997).

Abstract:
This paper examines hazards of repeated mortgage default, conditional on reinstating out of an initial default episode. Results indicate that subsequent default risk for reinstated borrowers if significantly greater than the risk of first default, especially during the first two years after a default episode. In addition, economic factors helpful in predicting first defaults are not helpful in predicting subsequent default episodes. This has important implications for mortgage investors and servicers as industry foreclosure avoidance efforts intensity.

Abstract:
This paper develops a model of the market for commercial real estate loans based on the variables used by investors and lenders in property decision-making: the income capitalization (cap) rate, the debt-coverage ratio and the loan-to-value ratio. Empirical results for aggregate United States real estate originations and commitments for 1970-93 indicate that loan demand is sensitive to the cap rate and to building permit issuance. The dominant criterion used by lenders is the debt-coverage ratio as opposed to the loan- to-value ratio, a finding which may have implications for underwriting standards and credit policy.

Abstract:
As a government sponsored enterprise, Fannie Mae enjoys certain advantages over other firms. The extent of these advantages, while widely discussed, have not yet been fully quantified. This paper empirically examines the returns to Fannie Mae general obligation bonds under the assumptions of the Arbitrage Pricing Theory. The model provides an explicit method for estimating the risk premium on Fannie Mae bonds. The results indicate the liquidity and tax effects are important in explaining the returns to Fannie Mae bonds. The results also indicate that the market does not incorporate changes in the riskiness of the mortgage market into the returns on Fannie Mae bonds. The results provide support for the contention that Fannie Mae, as a government sponsored enterprise, enjoys a significant advantage over other firms in the capital market.

Abstract:
Subsidized loans may help increase home ownership in low income neighborhoods with positive social benefits, however there are risks and costs to the homeowners themselves. Home ownership increases incentives to maintain property and neighborhood, as well as decreasing the outflow of rents from low-income zones. These benefits, however are not costless to participants. With a mortgage comes the possibility of a default, the financial demands of maintenance, the reduction in alternate investment opportunities, an increased exposure to fluctuations in local economic conditions, and a drastic reduction in the liquidity of personal wealth. In this paper we examine the role of the owner-occupied house in the asset allocation decision of a family living in an area characterized as a low income neighborhood. We find that the current subsidies are likely to be too low relative to the costs. In particular, the tax law makes home ownership relatively less attractive to low-income families. This may explain a lack of home-ownership and thus, mortgage lending in low-income neighborhoods.

Abstract:
Over the last ten years single-family mortgage lenders have become more aware of the financial benefits of finding alternatives to foreclosure for borrowers who default on their mortgage obligations. In this paper, expected costs of foreclosure alternatives are parmeterized to solve for minimum probabilities of borrower success necessary to make pursuing them profitable for lenders. These break-even probabilities are found to be very insensitive to changes in a variety of factors, including interest-rate environments and time horizons. Simulations are performed across house-price-deflation scenarios, loan-to-value ratios, and post-default cure rates. Stochastic process are introduced through time distributions for foreclosure processing, property disposition, and house price appreciation.