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Abstract:
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.

Subprime lending, enforcement mechanisms, predatory lending, anti-predatory lending laws, mortgage lending, homeownership

Abstract:
This paper focuses on understanding the determinants of the performance of subprime mortgages. A growing body of literature recognizes the substantial lag between the time that a borrower stops making payments on a mortgage and the termination of the loan. The duration of this lag and the method by which the delinquency is ultimately terminated play a critical role in the costs borne by both borrower and lender. Using nested and multinomial logit, we find that delinquency and default are sensitive to current economic conditions and housing markets. Credit scores and loan characteristics also play important roles.

Mortgages, Subprime, Delinquency

Abstract:
This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage. Using a sample of subprime mortgages from the Loan performance database on securitized private-label pool collateral, we utilize a two-step estimation procedure to control for the endogeneity of delinquency in an estimation of default and prepayment probabilities. We find strong support for the "distressed prepayment" theory that very delinquent loans are more likely to prepay than to default and that the rate of increase of prepayment is substantially larger as delinquency intensity increases. Delinquency predominately leads to termination of a loan through prepayment while negative equity leads to termination through default.

Mortgages, Subprime, Delinquency

Abstract:
This paper examines what happens to mortgages in the subprime mortgage market once foreclosure proceeding are initiated. A multinominial logit model that allows for the interdependence of the possible outcomes or risks (cure, partial cure, paid off, and real estate owned) through the correlation of associated unobserved heterogeneities is estimated. The results show that the duration of foreclosures is impacted by many factors including contemporaneous housing market conditions, the prior performance of the loan (prior delinquency), ad the state-level legal environment.

mortgages, subprime, foreclosure

Abstract:
This paper examines what happens to mortgages in the subprime mortgage market once foreclosure proceeding are initiated. A multinominial logit model that allows for the interdependence of the possible outcomes or risks (cure, partial cure, paid off, and real estate owned) through the correlation of associated unobserved heterogeneities is estimated. The results show that the duration of foreclosures is impacted by many factors including contemporaneous housing market conditions, the prior performance of the loan (prior delinquency), and the state-level legal environment.

Mortgages, Subprime, Foreclosure

Abstract:
This paper examines the expected price appreciation of distressed property and compares it to the prevailing metropolitan area appreciation rate. Whether due to individual property or local area heterogeneity in appreciation, the results show that foreclosed property appreciates less than the area average appreciation rate. The magnitude of the deviation is sensitive to loan characteristics, legal restrictions, housing market conditions and marketing time.

price, appreciation, distressed, foreclosed

Abstract:
This paper examines the expected price appreciation of distressed property and compares it to the prevailing metropolitan area appreciation rate. The results show that the simple fact that the property is foreclosed indicates that it will be sold at a substantial discount (appreciate less than expected). The magnitude of the discount is sensitive to loan characteristics, legal restrictions, housing market conditions, and the bargaining position of the selling institution.

Distressed property, foreclosure, bargaining power, real estate owned property

Abstract:
Adjustable rate and hybrid loans have been a large and important component of subprime lending in the mortgage market. While maintaining the familiar 30-year term the typical adjustable rate loan in subprime is designed as a hybrid of fixed and adjustable characteristics. In its most prevalent form, the first two years are typically fixed and the remaining 28 years adjustable. Perhaps not surprisingly, using a competing risks proportional hazard framework that also accounts for unobserved heterogeneity, hybrid loans are sensitive to rising interest rates and tend to temporarily terminate at much higher rates when the loan transforms into an adjustable rate. However, these terminations are dominated by prepayments not defaults.

Mortgage, default, prepayment, subprime, adjustable Rate, hybrid

Abstract:
This paper examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market while refinancing and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate refinance loans. Consistent with survey evidence the propensity to extract equity while refinancing is sensitive to interest rates on other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from non cash-out refinances. For example, cash-outs are less likely to default or prepay, and the termination of cash-outs is more sensitive to changing interest rates and house prices.

Mortgage, Refinance, Cash-out, Consumption

Abstract:
After a mortgage is originated the borrower promises to make scheduled payments to repay the loan. These payments are sent to the loan servicer, who may be the original lender or some other firm. This firm collects the promised payments and distributes the cash flow (payments) to the appropriate investor/lender.

A large data set (loan-level) of securitized subprime mortgages is used to examine if individual servicers are associated with systematic differences in mortgage performance (termination). While accounting for unobserved heterogeneity in a competing risk (default and prepay) proportional hazard framework, individual servicers are associated with substantial and economically meaningful impacts on loan termination.

Mortgage, Default, Prepayment, Servicer

Abstract:
The introduction of subprime mortgage lending helped fill an unmet demand for mortgage credit by those who did not qualify for prime credit. The rapid growth of the subprime market provides indirect evidence that there were in the past (before subprime) and probably are again (after the subprime meltdown) many households who cannot purchase a home due to the lack of available mortgage products. Mortgage product innovation has made mortgage terms of art such as io (interest only) or neg-am (negative amortization) part of everyday parlance in the real estate business, but the last few years have also shown that very few institutional investors, underwriters, originators, or servicers fully understood the risks associated with these types of products. If these sophisticated market participants struggled with recent innovations it should come as no surprise that borrowers also struggled to understand them and utilize them effectively. Indeed, the great promise of subprime lending -- making homeownership feasible and an affordable reality for most Americans -- has instead turned into a financial debacle and a massive drag on the American economy.

Since the use of exotic or alternative mortgage products played a role in the subprime meltdown, it is important to understand when these products make sense and how far the market deviated from rationality. The research presented here begins this analysis using a county level empirical examination of the mechanisms used to select different types of subprime mortgages from 2000 through July 2007. In particular we examine the use of adjustable rate loans, hybrid rate loans, interest only loans, non-amortizing loans, and loans with balloon payments. The empirical results indicate that the economic and financial incentives play a large part in determining what types of loans people used to finance their home. We also examine how the use of these types of mortgages changed over time and how much of those changes were driven by economic and financial fundamentals. We find substantial evidence of the misallocation of mortgage types over the 2004-2007 time period. This may help us to project what a sensible subprime mortgage market should look like in the future and how far the mortgage market deviated from that path.

mortgage, subprime, alternative

Abstract:
Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce rejections, while having little impact on the flow (application and origination) of credit. However, the strength of the law, measured by the extent of market coverage and the extent of prohibitions, can have strong impacts on both the flow of credit and rejections.

Mortgages, Predatory, Laws, Subprime

Abstract:
Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This paper examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated a modest increase (decrease) in cost.

mortgages, predatory, laws, subprime, interest rates

Abstract:
Local authorities in North Carolina, and subsequently in at least 23 other states, have enacted laws intending to reduce predatory and abusive lending. While there is substantial variation in the laws, they typically extend the coverage of the Federal Home Ownership and Equity Protection Act (HOEPA) by including home purchase and open-end mortgage credit, by lowering annual percentage rate (APR) and fees and points triggers, and by prohibiting or restricting the use of balloon payments and prepayment penalties. Empirical results show that the typical local predatory lending law tends to reduce applications and rejections, while having little impact on the flow of credit and only a modest impact on interest rates. However, the strength of the law, measured by the extent of market coverage and prohibitions, can have strong impacts on both the flow and cost of credit.

Mortgages, Predatory, Laws, Subprime

Abstract:
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.

Real estate, mortgages, housing, abusive lending, predatory lending, mortgage products, product substitution, adjustment to prohibition

Abstract:
This article examines the choice of borrowers to extract wealth from housing in the high-cost (subprime) segment of the mortgage market and assesses the prepayment and default performance of these cash-out refinance loans relative to the rate of refinance loans. Consistent with survey evidence, the propensity to extract equity is sensitive to the relative interest rates of other forms of consumer debt. After the loan is originated, our results indicate that cash-out refinances perform differently from noncash-out refinances. For example, cash-outs are less likely to default or prepay, and the termination of cash-outs is more sensitive to changing interest rates and house prices.

Abstract:
Various states and other local jurisdictions have enacted laws intending to reduce predatory and abusive lending in the subprime mortgage market. These laws have created substantial geographic variation in the regulation of mortgage credit. This article examines whether these laws are associated with a higher or lower cost of credit. Empirical results indicate that the laws are associated with at most a modest increase in cost. However, the impact depends on the product type. In particular, loans with fixed (adjustable) rates are associated with a modest increase (decrease) in cost.

Abstract:
This paper extends weighted repeat sales house price indices to include new dimensions. For instance, houses that appreciate faster than the mean, as estimated by the index for that location, may experience a different variation structure than homes that appreciate slower. This process can be viewed as an asymmetric treatment of the variance of expensive and affordable homes may also be different and time varying. This paper finds evidence that adding the dimensions of price tiers and asymmetry to the variance estimate affects both the estimated index as well as homeowner equity estimates. Homeowner equity estimates are especially sensitive to these added dimensions because they depend on both the revised index and the estimated variances, which are specific to each dimension considered - time between transaction, asymmetry, and price tier.

repeat sales, house price(s), price tiers, asymmetry

Abstract:
Although nonprime lending has experienced steady or even explosive growth over the last decade very little is known about the performance characteristics of these mortgages.

Using data from national secondary market institutions, this paper estimates a competing risks proportional hazard model, which includes unobserved heterogeneity. The analysis examines the performance of 30 year fixed rate owner occupied home purchase mortgages from February 1995 to the end of 1999 and compares nonprime and prime loan default and prepayment behavior. Nonprime loans are identified by mortgage interest rates that are substantially higher than the prevailing prime rate.

Results indicate that nonprime mortgages differ significantly from prime mortgages: they have different risk characteristics at origination; they default at elevated levels; and they respond differently to the incentives to prepay and default. For instance, nonprime mortgages are less responsive to how much the option to call the mortgage or refinance is in the money and this effect is magnified for mortgages with low credit scores. Tests also reveal that default rates are less responsive to homeowner equity when credit scores are included in the specification.

mortgage, performance, default, prepay, prepayment, unobserved heterogeneity, credit history, credit curing

Abstract:
This paper details the construction of an index of export goods prices (the Export Price Index or EPI) for a panel of 196 metropolitan areas from 1977 to 1992. The EPI is an indicator of external demand shocks to the city economy which does not suffer from the causal ambiguity of the endogenous indicators such as income, employment or output. The creation of an index of aggregate export prices, the EPI, for the panel of areas provides both academicians and policy analysts with a new exogenous indicator that identifies demand price innovations and the terms of trade shocks to cities.