Thrift Viability and Traditional Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off

The Journal of Real Estate Research, vol. 13, 2, 1997, 155-175.

Posted: 9 Mar 2015

See all articles by M. Cary Collins

M. Cary Collins

University of Tennessee, Knoxville - Department of Finance

Van Son Lai

Université Laval

James E. McNulty

Florida Atlantic University

Date Written: 1997

Abstract

A number of studies have argued that the thrift industry is not viable as it is presently structured and regulated because mortgage yields are inadequate to cover interest and operating costs. This hypothesis suggests that observed profitability is primarily the result of the tendency of the industry to "ride" the yield curve by borrowing short and lending long. To evaluate this argument, we construct a simultaneous-equations mode) of thrift risk (maturity gap positions) and return (net interest margin). We find support for the notion that the industry could not be reasonably profitable if it did not take on significant interest-rate risk. For instance, a zero gap position produces a return on assets of only 19 basis points and a return on equity of only 4%.

We also estimate the amount of interest-rate risk the industry can employ to increase returns on equity and assets. Our estimates show that over 50% of thrift profits earned during this period are the result of negative gap positions and interest-rate speculation. As earlier research shows, changes in regulations affecting thrift asset and liability choices can be counterproductive.

Suggested Citation

Collins, M. Cary and Lai, Van Son and McNulty, James E., Thrift Viability and Traditional Mortgage Lending: A Simultaneous Equations Analysis of the Risk-Return Trade-Off (1997). The Journal of Real Estate Research, vol. 13, 2, 1997, 155-175., Available at SSRN: https://ssrn.com/abstract=2575416

M. Cary Collins

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

Van Son Lai (Contact Author)

Université Laval ( email )

FSA ULaval
Quebec G1V 0A6
Canada
418-656-2131, x3943 (Phone)

James E. McNulty

Florida Atlantic University ( email )

777 Glades Rd.
Boca Raton, FL 33341
United States
(561) 297-2708 (Phone)

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