Valuing Federal Disaster Loans: A Stochastic Model Approach

27 Pages Posted: 18 Dec 1998

See all articles by Nelson Lacey

Nelson Lacey

University of Massachusetts at Amherst

Austin Kelly

Federal Housing Finance Agency (FHFA)

Mark Potter

Babson College - Finance Division

Multiple version iconThere are 2 versions of this paper

Abstract

Between 1986 and 1990, the Small Business Administration made approximately $800 million in hurricane and flood disaster loans. The President's 1999 budget submission proposes that these loans be sold to private investors. Using data on over 130,000 disaster loans, and employing a stochastic interest rate model, we estimate the probability of a loan prepaying or being written off. We find that interest rate subsidy costs are significant components of the overall subsidy rate - for every dollar in loans granted, the government recovers between seventy and seventy-four cents, in present value terms. The valuation approach used in this paper can be applied to other government programs that repackage and sell loans to private investors.

JEL Classification: G12, G20, H20, M41

Suggested Citation

Lacey, Nelson J. and Kelly, Austin J. and Potter, Mark E., Valuing Federal Disaster Loans: A Stochastic Model Approach. Available at SSRN: https://ssrn.com/abstract=141033 or http://dx.doi.org/10.2139/ssrn.141033

Nelson J. Lacey (Contact Author)

University of Massachusetts at Amherst ( email )

School of Management
Amherst, MA 01003
United States
413-545-5630 (Phone)
413-545-3858 (Fax)

Austin J. Kelly

Federal Housing Finance Agency (FHFA) ( email )

1700 G St. NW
Washington, DC 20552
United States
202 414-1336 (Phone)

Mark E. Potter

Babson College - Finance Division ( email )

Tomasso Hall #120
Babson Park, MA 02457-0310
United States
781-239-6492 (Phone)
781-239-5004 (Fax)

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