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Mortgages II

Paper Session

Saturday, Jan. 6, 2018 2:30 PM - 4:30 PM

Loews Philadelphia, Washington C
Hosted By: American Real Estate and Urban Economics Association
  • Chair: W. Scott Frame, Federal Reserve Bank of Atlanta

Disclosure Cost and Securitization Design for Commercial Mortgages

Stephen Buschbom
,
University of Georgia
James Kau
,
University of Georgia

Abstract

This paper studies the role of disclosure cost in securitization design for issuers of commercial mortgage-backed securities (CMBS). Specifically, a theoretical model of an issuer's decision regarding what percentage of bonds in a mortgage pool are sold through public issuance versus privately is tested, where investors in the publicly issued securities receive information which is less costly to process and less costly for the seller to disclose relative to the information provided to private investors. Issuer's maximize new issue proceeds by issuing bonds privately only when the alternative of public issuance would result in a lower price, net of disclosure cost to both the issuer an investor. The paper's empirical results show that the percentage of a mortgage pool issued privately increases as ex ante expected delinquency in the pool increases, consistent with the theoretical prediction that an investor in publicly issued securities is willing to pay less than a private investor given the uncertain asset quality requires either more information or greater ability to process information.

Unconventional Monetary Policy and Risk-Taking: Evidence from Agency Mortgage REITs

W. Scott Frame
,
Federal Reserve Bank of Atlanta
Eva Steiner
,
Cornell University

Abstract

The Federal Reserve’s unconventional monetary policy since the financial crisis has raised concerns about the potential for excessive risk-taking by financial institutions. The U.S. Financial Stability Oversight Council was specifically concerned about the rapid growth of Agency mortgage REITs (Agency MREITs), a group of specialized, tax-exempt financial institutions investing in mortgage-backed securities (MBS). This paper studies whether and how the central banks’ policy actions influenced the behavior of these institutions. We find that Agency MREIT growth was inversely associated with Federal Reserve activity in the Agency MBS market – consistent with the crowding-out of private investment as per the portfolio balance channel of unconventional monetary policy. Equity returns for these REITs also seem to reflect the presence or absence of growth opportunities for them in the Agency MBS market depending on the central banks’ posture. Consistent with the risk-taking channel of monetary policy, Agency MREITs seemingly reduced their interest rate hedging during the initial stages of quantitative easing, as the Federal Reserve indicated policy rates would remain low for a considerable period of time. This trend later reversed after the central bank resumed Agency MBS purchases during QE3 and through their tapering of such purchases.

Do Financial Constraints Cool a Housing Boom? Theory and Evidence From a Macroprudential Policy on Million Dollar Homes

Lu Han
,
University of Toronto
Chandler Lutz
,
Copenhagen Business School
Ben Sand
,
York University
Derek Stacey
,
Ryerson University

Abstract

In this paper we seek to understand the role of financial constraints in the housing market and their effectiveness as a macroprudential policy tool aimed at cooling a housing boom. We exploit a natural experiment arising from the 2012 Canadian law change that restricts access to mortgage insurance (MI) whenever the purchase price of the home is 1 million Canadian dollars or more. Our empirical approach is motivated by a directed search model that features auction mechanisms and financially constrained bidders. We model the introduction of the Canadian MI regulation of 2012 as a tightening of the financial constraint faced by a subset of prospective buyers. This prompts some sellers to reduce their asking price in order to elicit bids from both constrained and unconstrained buyers. Competition between bidders intensifies, which dampens the impact of the policy on sales prices. Using transaction data from the Toronto housing market, we employ a distribution regression approach combined with a regression discontinuity design to test the model's predictions. We find that the limitation of MI causes a 1.05 percent increase in the annual growth of houses listed just under $1M and a 0.33 percent increase in the annual growth of houses sold just below $1M. In addition, the policy causes a sharp rise in the incidence of both shorter-than-average listing times and sales above asking in the under $1M segment, consistent with the model's predictions. Overall, our analysis points to the importance of strategic and equilibrium considerations in assessing the effectiveness of macroprudential policies.

Relational Contracts, Reputational Concerns, and Appraiser Behavior: Evidence from the Housing Market

Changcheng Song
,
National University of Singapore
Sumit Agarwal
,
National University of Singapore
Vincent Yao
,
Georgia State University

Abstract

We document that 42% of appraisals are at or near the contract value, while only 7.5% are below the contract value. Appraisers are rewarded for delivering at- and above-contract appraisals that facilitate housing transactions and punished for below-contract appraisals that are disruptive. When the long-term relationship between appraisers and lenders is broken down under the new laws, there are fewer at- and above-contract appraisals. These results are consistent with relational contracts and reputational concerns of appraisers. We also find that at- and above-contract appraisals are associated with higher loan approval, higher default, and higher prepayment risks.
Discussant(s)
Craig Furfine
,
Northwestern University
Rodney Ramcharan
,
University of Southern California
Franco Zecchetto
,
Technological Autonomous University of Mexico (ITAM)
Anthony DeFusco
,
Northwestern University
JEL Classifications
  • G2 - Financial Institutions and Services
  • R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location