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Adverse market events can affect credit supply not only by hurting financial fundamentals but also by changing the risk-taking behaviors of individual decision-makers. We provide micro-level evidence of this individual decision-making channel in the U.S. mortgage market. We find that mortgage application rejection rates are more sensitive to foreclosure intensity when loan officers are more exposed to foreclosure news, despite the same housing market and bank fundamentals. Loans originated from the affected branches have lower ex post default rates, consistent with higher lending standards being applied. In the aggregate, this effect results in tighter credit supply during housing market downturns. [ABSTRACT FROM AUTHOR]

The paper analyses the Loss Given Default (LGD) rates of residential mortgages, using a model based on stochastic collateral value. The implementation of the model is based on exponential Ornstein-Uhlenbeck processes fitted to the Hungarian regions' house price indices. According to the model results, in case of a mortgage with a 80% loan-to-value ratio at origination, the expected LGD is around 30–40%, depending on the region. The highest LGD rates are estimated for villages, while the lowest rates are expected in Budapest and cities in the middle of the country. The range of the regional differences can reach 7 percentage points. According to the LGD Risk index based on the aggregated model, the LGD risk profile of recently issued mortgages has improved significantly since 2009 in Hungary. Due to the strong negative relation between the house prices and mortgage default rates, the expected return on defaulted collateral value tends to be low. The results could be relevant for credit institutions in their mortgage origination decisions and enhance analysis of lending processes and the associated risks. [ABSTRACT FROM AUTHOR]

Using the Credit Risk Transfers (CRTs) issued by Fannie Mae and Freddie Mac, we study how, absent government intervention, mortgage markets would price hurricane risk. Currently, such risk is priced equally across locations even if it is location‐specific. We hand collect a novel and detailed database to exploit CRTs' heterogeneous exposure to Hurricanes Harvey and Irma. Using a diff‐in‐diff specification, we estimate the reaction of private investors to hurricane risk. We use the previous results to calibrate a model of mortgage lending. We simulate hurricane frequencies and mortgage default probabilities in each US county to derive the market price of mortgage credit risk, that is, the implied guarantee fees (g‐fees). Market‐implied g‐fees in counties most exposed to hurricanes would be 70% higher than inland counties. [ABSTRACT FROM AUTHOR]

All over the world, home loans and mortgages are part and parcel of the products and services being offered by the financial institutions-such as banks and homeowner mortgage institutions to their numerous customers. Prior, during and post home loan transactions, they owe their customers the duty to ensure full disclosure of all the terms and conditions in the mortgage agreements without withholding any information. This paper examines any act contrary to uberrimae fidei-utmost good faith in the transactions. Uberrimae fidei requires the highest standard of good faith on both the lender and borrower to disclose all material facts that could influence the decisions of the other party in seeking and granting home loans and mortgages. Failure might result in severe consequences by exploring both the civil and criminal responsibilities and liabilities of the party who acted mala fide-in bad faith. Against this backdrop, this paper examines the protection offered by the laws to ensure level playing field prior, during and after mortgage lending transactions. [ABSTRACT FROM AUTHOR]

This research studies the effects of mortgage subsidies and asymmetric information in the US mortgage market. I exploit discontinuities in interest rates generated by pricing rules and find patterns consistent with advantageous selection. I estimate an industry model that highlights the relationship between mortgage subsidies, intermediary lenders' incentives, and borrowers' advantageous selection. The model shows that mortgage subsidies enable advantageous selection, creating a deadweight loss of $7.90 billion. The counterfactual analysis reveals that pricing borrowers' private information eliminates advantageous selection only if mortgages are not subsidized. Without the mortgage subsidy, pricing borrowers' private information improves efficiency by $728.58 million. [ABSTRACT FROM AUTHOR]

The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, matching, and search costs, generating what we term "markups" above or below the average market price. We measure markups for 3.4 million purchase‐money mortgages and show that they can predict mortgage defaults and credit losses conditional on default even after accounting for collateral coverage (loan‐to‐value ratio) and a comprehensive set of other covariates. The findings suggest that standard collateral coverage estimation may be inaccurate, with implications for both individual and portfolio‐level credit risk assessment. [ABSTRACT FROM AUTHOR]

Reverse mortgages are designed to offer additional sources of financing incomes to senior homeowners. In the United States, home equity conversion mortgages (HECMs) are nonrecourse reverse mortgage loans insured by the Federal Housing Administration (FHA). Based on a fairly recent stream of the reverse mortgage literature, the relatively high loan-to-value ratio has jeopardized the financial soundness of such contracts. In the wake of the 2008 financial crisis, rising property taxes and homeowner insurance defaults impaired HECM solvency; hence, policy changes were implemented to help prevent borrower default. In this paper, we propose a pricing solution which, as we demonstrate in the paper, effectively improves program solvency by fairly matching the benefits and liabilities of HECM participants. The methodology allows for customization of fair mortgage loan payments and premiums and improves program accessibility based on borrowers' individual credit and default risk. Our proposed pricing solution and the corresponding newly designed rating system provide HECM policymakers with a better payment arrangement and offer important policy implications for the current HECM program. Rather than borrower property taxes and insurance delinquency, we demonstrate that the mispricing of HECM mortgage insurance premiums and the corresponding loan payments could be the primary reasons for program insolvency. [ABSTRACT FROM AUTHOR]

The Community Reinvestment Act (CRA) encourages banks to lend to low‐ and moderate‐income individuals. This paper estimates the effect of the CRA on mortgage lending, exploiting variation in the set of banks whose lending performance is assessed in a given neighborhood due to redefinitions of Metropolitan Statistical Areas in 2003. Incorporating a typical tract into one additional banks' assessment area increased mortgage lending there by approximately 2%. Lending to low‐income borrowers was particularly affected. While income‐conditional default risk was little changed, CRA‐induced loans were riskier than average, due to their borrowers' lower incomes. [ABSTRACT FROM AUTHOR]

During the Global Financial Crisis, house prices sharply declined in all West‐European countries, but after an initial recovery the Dutch housing market experienced a second dip. This paper examines whether the introduction of the tightened Code of Conduct for Mortgage Loans in 2011 had an effect on Dutch house prices. We compare the evolution of Dutch house prices with a synthetic control of other European countries. Our results suggest that the introduction of the new Code of Conduct did indeed have a substantial negative effect on Dutch house prices in the 2 years following its introduction. Several robustness checks confirm this conclusion. [ABSTRACT FROM AUTHOR]

We show that banks with high environmental, social, and governance (ESG) ratings issue fewer mortgages in poor localities—in number and dollar amount—than banks with low ESG ratings. This lending disparity happens at both the county and census tract level, worsens in disaster areas of severe hurricane strikes, is robust to alternative ESG ratings (including using only the social (S) component), and cannot be explained by banks' differential deposit networks. We find no difference in mortgage default rates between high- and low-ESG banks, rejecting an alternative explanation based on differential credit screening quality. We report a complementary, not substitution, relation between high-ESG banks' mortgage lending and their community development investments (like affordable housing projects) in poor localities. Loan-application-level analyses confirm that high-ESG banks are more likely than low-ESG banks to reject mortgage loans in poor neighborhoods. The evidence hints at social wash: banks deploy prosocial rhetoric and symbolic actions while not lending much in disadvantaged communities, the social function they arguably ought to perform. Community Reinvestment Act (CRA) examinations partially undo the social wash effect. [ABSTRACT FROM AUTHOR]

Previous studies have yielded ambiguous results regarding the impact of income and financial experience on the decision of residential borrowers to strategically default. One explanation for these findings is the presence of an interaction effect between income and financial experience, which was ignored in earlier studies. We hypothesize that borrowers with a greater ability to assess the financial benefits of strategic default, due to a higher financial experience, and overcome the financial consequences of it, due to higher incomes, have fewer negative attitudes towards strategic default. We capture negative attitudes of US homeowners (borrowers) by measuring their anger towards residential borrowers who decided to strategically default. In particular, we (1) ask them to self-report their anger and (2) measure their anger with artificial intelligence (AI)-based emotion recognition software. We find evidence for the hypothesized interaction effect: Borrowers with higher incomes and greater financial experience, particularly regarding value of money, savings, and investments, have fewer negative attitudes towards strategic default. Our results have implications for mortgage lenders. While borrowers with higher incomes and more financial experience are likely to have a lower economic default risk, their strategic default risk may be higher. [ABSTRACT FROM AUTHOR]

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The international credit crisis of 2008–2013 changed the legal landscape of mortgage enforcement proceedings in Europe dramatically. The growing influence of the international right to housing, the increasing attention towards homeowner protection, the renewed policies towards mortgage financing and the changes in national legislation, make the study of these proceedings relevant and interesting. Moreover, the phase between default of the mortgage debtor and the actual start of these proceedings is becoming more and more relevant because of these developments. Nonetheless, this phase is quite underresearched, especially from a comparative legal research point of view. Our comparative study therefore takes a different approach than classical comparative studies on mortgage enforcement procedures. With this project, we investigate the approaches of mortgage lenders after the mortgage debtor is in default with his mortgage obligations. These approaches can be based on legislation, self-regulation or agreements with the mortgagor. The aim of this project is to discover how these regulations function in practice. This paper provides an introduction to this emerging legal comparative research project on, what we call, default resolution approaches in Europe. We explain the main interests involved in default resolution approaches and the dimensions that should be taken into account in our study. We then sketch our comparative framework for further research. [ABSTRACT FROM AUTHOR]

The Home Affordable Modification Program's (HAMP's) Principal Reduction Alternative (PRA) is a government-sponsored program to reduce the principal balances and monthly mortgage payments of troubled borrowers. We examine the effect of principal forgiveness on borrowers' subsequent mortgage default. The program's rules imply a kink in the relationship between principal forgiveness and a borrower's initial equity level. Our identification strategy exploits the quasi-experimental variation in principal forgiveness generated by this kink using a regression kink design (RKD), which compares the relationship between initial equity and default on either side of the kink. We estimate that HAMP PRA reduced the quarterly default hazard from 3.8% to 3.1%. [ABSTRACT FROM AUTHOR]

Considerable meteorological research suggests that the frequency and intensity of North Atlantic hurricanes are rising. This analysis focuses on estimating the impacts of hurricane intensity and frequency on mortgage delinquency. Based upon a large loan-level dataset of mortgages purchased by Freddie Mac between 1999 and 2015, loans with an average lifetime Saffir–Simpson hurricane rating of 3 or more were found to be 88 per cent more likely to become delinquent than other loans in the same locations, controlling for all other risk factors. This result has important implications for mortgage and insurance markets and homeowners. First, if longterm hurricane trends bear out, mortgage default risk in areas with a higher incidence of major hurricanes will likely rise significantly over time. Secondly, investors in mortgage credit risk from these locations will face higher default losses in the future. Thirdly, private investors in mortgage credit-risk transfer (CRT) securities could experience higher credit losses of loans from hurricaneprone areas. Investors in lower-rated tranches would be particularly impacted given the nature of their exposure to losses earlier than more highly rated tranches. Catastrophe bonds could be used to diversify hurricane risks to investors that may be in a better position to assess and hold this risk. [ABSTRACT FROM AUTHOR]

Following the financial crisis of 2009 there was an emergence of macroprudential policy tools, as well as a need to model the macroeconomy and the financial sector in a coherent framework. This paper develops and calibrates a small open economy DSGE model for Lithuania to shed some light on the interactions between the macroeconomy and the banking sector, regulated by macroprudential policy. The model features housing market, and endogenous credit risk a la de Walque et al. (2010), whereby the household can default on mortgage repayments, what leads to housing collateral seizure. Foreign-owned banks, that are subject to risk-sensitive macroprudential capital requirements, take into account not only the mortgage default rate but also the cap on loan to value (LTV) ratio when making lending decisions. Using this mechanism, we show that while a more stringent LTV constraint reduced credit demand, it can also lead to an expansion in credit supply via lower credit risk. Therefore, a tightening of LTV requirement should result in only a slight reduction in mortgage lending, coupled with lower interest rate margins. The article compares the impact of the tightening of three macroprudential tools, namely, bank capital requirements, mortgage risk weights and LTV limit. We find that broad-based capital requirements, such as the counter-cyclical capital buffer, are less efficient in leaning against the housing credit cycle, because of a relatively large cost incurred on the firm sector. [ABSTRACT FROM AUTHOR]

Home appraisals are produced for millions of residential mortgage transactions each year. In addition to preventing fraudulent transactions, an important benefit of appraisals when they report a value below the contract price is that they help borrowers renegotiate prices with sellers. However, appraised values are rarely below the purchase contract price: Some 30% of appraisals in our sample are exactly at the home price (with less than 10% of them below it). We construct a simple but intuitive model to explain how appraisers' incentives within the institutional framework that governs mortgage lending lead to information loss in appraisals (i.e., appraisals set equal to the contract price). We also present new empirical findings relevant to the issue of appraisal accuracy, based on analysis of appraisal and contract price data and analysis of mortgage default patterns. One new finding—that the frequency of appraisal equal to contract price increases at the loan‐to‐value boundaries (notches) typical of mortgage pricing schedules—is, in fact, implied by our model. In addition, consistent with information loss or, more broadly, with the view that appraisals often artificially confirm the contract price, we find that mortgages with appraised value equal to the contract price are more likely to default. [ABSTRACT FROM AUTHOR]

The article discusses the topics covered by the 2021 Annual Survey of Consumer Financial Services Law in the U.S. amidst the COVID-19 pandemic. Other topics include how the pandemic affected default mortgage servicing, the federal Coronavirus Aid, Relief, and Economic Security (CARES) Act's provision on mortgage foreclosure moratorium, and the proposed rulemaking from the Consumer Financial Protection Bureau (CFPB) on mortgage loans.

In understanding the determinants of mortgage default, the consensus has moved from an 'option theory' model to the 'double trigger' hypothesis. Nonetheless, that consensus is based on within-country studies of default. This paper examines the determinants of mortgage default across five European countries, using a large dataset of over 2.3 million active mortgage loans originated between 1991 and 2013 across over 150 banks. The analysis finds support for both elements of the double trigger: while negative equity itself is a relatively small contributor to default, the effect of unemployment, and other variables such as the interest rate, is stronger for those in negative equity. The double trigger, however, varies by country: country-specific factors are found to have a large effect on default rates. For any given level of a loan's Loan to Value ("LTV") ratio, and as LTV changes, borrowers were more sensitive to the interest rate and unemployment in Ireland and Portugal than in the UK or the Netherlands. [ABSTRACT FROM AUTHOR]

In 2007, approximately 20% of U.S. homeowners with a subprime mortgage loan experienced mortgage default, which resulted in the bank foreclosing on their home. The purpose of this study is to explore strategies that bank managers and lenders used to reduce mortgage default rates. The conceptual framework for this study included elements from Berle and Means' agency theory and Donaldson's stewardship theory. Potential homeowners may experience lower mortgage defaults if they have a clear and concise communication, better understanding of the various types of mortgage loans, especially subprime loans, and the review of the mortgage lending process. This study also provides strategies that will enable both lenders and borrowers to minimize mortgage default rates and to provide information to future homeowners seeking to obtain a mortgage loan. [ABSTRACT FROM AUTHOR]

Our paper forecasts the expected recovery rates of defaulted Italian mortgage loans backed by either residential or commercial real estate. We apply an exponential Ornstein-Uhlenbeck process to model the price dynamics at the provincial and regional level, and two haircut models to estimate the liquidation value. Compared to our findings, rating agencies such as Moody's, which use geometric Brownian motion to model the price dynamics, paint a rosier picture with higher recovery rates. As a consequence, non-performing mortgage loans held by Italian banks might be overvalued. [ABSTRACT FROM AUTHOR]

This paper studies how information frictions in the securitization market amplify the response of mortgage credit supply to house price shocks. Securitization prices and quantities endogenously result from an optimal contracting problem between investors and banks. Banks are better informed than investors about the quality of mortgages they originate, leading to adverse selection in securitization. Investors use the quantity sold as a screening device to induce banks to reveal truthful information. We find that adverse selection amplifies the response of a bank's mortgage credit to house price shocks. The degree of amplification is also a function of the technological differences in managing portfolios between banks and investors. The model is informative on how information frictions can induce large fluctuations in mortgage credit supply. • Banks and investors interact in a securitization market affected by private information. • Investors screen banks' mortgage portfolios by designing securitization contracts. • House price shocks affect securitization through nonlinear price and quantity effects. • Aggregate credit supply becomes a nonlinear function of securitization liquidity. • Adverse selection amplifies the credit supply response to house price shocks. [ABSTRACT FROM AUTHOR]

The idea that real estate could have contributed to banking crises during the Great Depression has been downplayed due to the conservatism of mortgage contracts at the time. For instance, loan-to-value ratios often did not exceed 50 per cent. Using newly discovered archival documents and data from 1934, this article uncovers a darker side of 1920s US mortgage lending: the so-called 'second mortgage system'. As borrowers often could not make a 50 per cent down payment, a majority of them took second mortgages at usurious rates. As theory predicts, debt dilution, even in the presence of seniority rules, can be highly detrimental to both junior and senior lenders. The probability of default on first mortgages was likely to increase, and commercial banks were more likely to foreclose. Through foreclosure they would still be able to retrieve 50 per cent of the property value, but often after a protracted foreclosure process. This would have put further strain on banks during liquidity crises. This article is thus a timely reminder that second mortgages, or 'piggyback loans' as they are called today, can be hazardous to lenders and borrowers alike. It provides further empirical evidence that debt dilution can be detrimental to credit. [ABSTRACT FROM AUTHOR]

ABSTRACT Homeowners at risk of default face a debt overhang that reduces their incentive to invest in their property: in expectation, some value created by investments in the property will go to the lender. This agency conflict affects housing investments. Homeowners at risk of default cut back substantially on home improvements and mortgage principal payments, even when they appear financially unconstrained. Meanwhile, they do not reduce spending on assets that they may retain in default, including home appliances, furniture, and vehicles. These findings highlight an important financial friction that has stifled housing investment since the Great Recession. [ABSTRACT FROM AUTHOR]

We examine the correlation between prime mortgage default risk and the introduction of subprime mortgages in a local area. We motivate our analysis with a model of a default contagion effect that spreads the effect of a mortgage foreclosure from one property to surrounding properties. Through numerical analysis, we demonstrate the effect of subprime mortgage originations to the risk of prime mortgages. Finally, we offer empirical support for our model by examining the spatial variation in MSA prime mortgage default rates and the level of subprime mortgage activity. [ABSTRACT FROM AUTHOR]

• We propose several XGBoost extensions to learn class-imbalanced data. • Fit the techniques to a vast, dynamic and public Freddie Mac mortgages data. • Assess model performance relative to data complexity and external validity. • Gauge the business value of the techniques using a profitability measure. • A proposed GEV link with a modified focal loss in XGBoost is best for rare/outlier cases. There is often a significant class imbalance in credit scoring datasets, mainly in portfolios of secured loans such as mortgage loans. A class imbalance occurs when the number of non-default cases outweighs the number of default cases. A naive classifier can achieve high accuracy by assigning all cases to the majority class; however, misclassifying the minority class is often costly. In XGBoost, a well-known and robust classification method, we propose that the quantile function of the generalized extreme value (GEV) distribution is used as a link function to enhance the detection of rare cases. To complement the GEV link function, the study applies a modified focal loss function in XGBoost to jointly penalize misclassification of the class of interest and focus on hard, tricky to classify cases. We test our proposal on a vast database of mortgage loans with rare default cases, available on the Freddie Mac website. As benchmarks, we also consider other common large credit scoring databases, existing extensions of XGBoost to handle classification imbalance and other state-of-the-art classification techniques for learning class-imbalanced data. According to the results, the proposed model has a superior predictive power to other competing models if the class imbalance is due to default events being outliers or rare in the dataset. We also demonstrate that the results will likely hold up in real-world situations and add business value under certain portfolio characteristics. [ABSTRACT FROM AUTHOR]

This study seeks to assess the determinants of property rates default in the Ashanti Region of Ghana. A multi-stage sampling technique was used to study 540 respondents from one municipal and five district assemblies within the region. A structured questionnaire collected data from the sampled respondents. Descriptive statistics (means, frequency distribution and percentages) and the probit regression model were then used to analyse the data with the help of SPSS and STATA respectively. The study found that most respondents who default are not aware of their obligation to pay property rates, and those who are aware fail to pay because they don't know where to go to pay, or think the rate is too high. The study also revealed that a demographic characteristic such as income level, property value and property location influences rates of default. The study recommends raising awareness about the need to pay property rates and the penalty for any default. [ABSTRACT FROM AUTHOR]

We investigate whether homeowners respond strategically to news of mortgage modification programs. We exploit plausibly exogenous variation in modification policy induced by settlement of US state government lawsuits against Countrywide Financial Corporation, which agreed to offer modifications to seriously delinquent borrowers. Using a difference-in-differences framework, we find that Countrywide's monthly delinquency rate increased more than 0.54 percentage points-a 10 percent relative increase-immediately after the settlement's announcement. The estimated increase in default rates is largest among borrowers least likely to default otherwise. These results suggest that strategic behavior should be an important consideration in designing mortgage modification programs. (JEL D14, G21, K22, R31) [ABSTRACT FROM AUTHOR]

This paper examines how differences in state foreclosure laws influence the incidence of default in the residential mortgage market. In particular, we examine how judicial review requirements, lenders' recourse rights (deficiency judgments), and state assistance programs for distressed borrowers affected the likelihood of default during the recent U.S. housing crisis. We argue that state foreclosure laws should have little effect on the likelihood of liquidity events (for example, shocks to borrowers' ability to make payments) and thus provide a good instrument for identifying borrowers' costs of default. We find that borrowers with negative home equity are significantly more likely to default in states with borrower-friendly foreclosure laws. Finally, we examine how recent state and federal loan foreclosure prevention programs affected the likelihood of default. Overall, we find a significant decline in the effect of judicial review requirements but not deficiency judgments on default after 2008. [ABSTRACT FROM AUTHOR]

In this paper, I use logistic regression to study the relationship between walkability and mortgage default risk in multifamily housing in a pool of nearly 37,000 Fannie Mae loans. Walkability is measured with Walk Score, a widely available metric. Controls were introduced for loan terms, property characteristics, neighborhood conditions, and macroeconomics. Walkability reduced default risk but the relationship was nonlinear with thresholds. Default risk significantly increased where walkability was very low and significantly decreased where it was very high. The implication is that walkability and its possible benefits to health and the environment could be fostered by relaxing lending terms without adding default risk. [ABSTRACT FROM AUTHOR]

The article discusses how mandatory mediation reduces mortgage servicers' financial incentives to prefer default management over loss mitigation in America as of 2013, and it mentions foreclosure mediation in the U.S., economic pressure on mortgage servicers, and the transaction and overhead costs that are associated with loss mitigation. According to the article, mortgage servicers are responsible for administering mortgage loans. Third-party mortgage servicers are also examined.