January 27, 2016
Benjamin Keys, Devin Pope and Jaren Pope have recently had their Failure to Refinance paper accepted in the Journal of Financial Economics. A version of the paper can be found on SSRN. This academic paper has a lot of relevance to many a homeowner. The abstract reads,
Households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings. Based on a large random sample of outstanding U.S. mortgages in December of 2010, we estimate that approximately 20% of households for whom refinancing would be optimal and who appeared unconstrained to do so, had not taken advantage of the lower rates. We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake. To shed light on possible mechanisms and corroborate our main findings, we also provide results from a mail campaign targeted at a sample of homeowners that could benefit from refinancing.
The authors conclude,
Our results suggest the presence of information barriers regarding the potential benefits and costs of refinancing. Expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision is a potential direction for policy to alleviate these barriers for the population most in need of financial education.
In addition, the magnitude of the financial mistakes that households make suggest that psychological factors such as procrastination, trust, and the inability to understand complex decisions are likely barriers to refinancing. One policy that has been suggested to overcome the need for active household participation would require mortgages to have fixed interest rates that adjust downward automatically when rates decline To the extent that it is undesirable to reward only those households that are able to overcome the computational and behavioral barriers of the refinance process, policies such as an automatically-refinancing mortgage may be beneficial. Although an automatically-refinancing mortgage contract would be more expensive up-front for all borrowers in equilibrium, it would remove the cross-subsidization in the current mortgage finance system, where savvier homeowners who use their refinancing option when rates decline are subsidized by those households who fail to do so. (20, citation omitted)
I have heard a number of proposals that call for automatically refinancing mortgages. Such a mortgage product would shake up the mortgage market in its current form and require a transition period to figure out how it should be priced. But the net result would certainly benefit homeowners in the aggregate.
- Owner Occupancy Fraud and Mortgage Performance, Ronel Elul & Sebastian G. Tilson, FRB of Philadelphia Working Paper No. 15-45.
- A Tale of Two Worlds: Wealth and Wastage, and Scarcity and Sustainability, Masudur Rahman, OIDA International Journal of Sustainable Development, Vol. 08, No. 11, pp. 11-24, 2015.
- How Genetics Might Affect Real Property Rights, Mark A. Rothstein & Laura Rothstein, Journal of Law, Medicine and Ethics, Vol. 44, No. 1, 2016.
- Bank Capital and Lending Relationships, Michael Schwert.
- The Effect of Relational Capabilities and Managerial Capabilities on Performance Outcome: A Comparison between Architecture Firms and Real Estate Development Companies, Marijana Sreckovic.
- Environmental Performance and the Cost of Capital: Evidence from Commerical Mortgages and REIT Bonds, Piet M.A. Eichholtz, Rogier Holtermans, Nils Kok & Erkan Yönder.
- Income Equality Across Cities, Jung Hyun Choi & Richard K. Green.
- Estimating a Dynamic Discrete Choice Model with Partial Observability for Household Mortgage Default and Prepayment Behaviors, Chao Ma.
January 26, 2016
Researchers at Penn State have posted a report, From Air Mattresses to Unregulated Business: An Analysis of the Other Side of Airbnb. The Executive Summary reads,
As the popularity—and controversy—over short-term rental platforms grows in the public arena, this report takes a closer look at the hosts dominating one of the most trafficked platforms, Airbnb. The company, valued at some $24 billion dollars, has a reported 2 million listings worldwide. In media interviews and public materials, Airbnb suggests that its hosts are largely using the platform to make some additional money on the side. It states that “a typical listing earns $5,110 a year, and is typically shared less than 4 nights per month.”
But that does not represent the full picture.
This report represents the first comprehensive look at the commercial activity being conducted on Airbnb. By analyzing hundreds of thousands of data points, the report reveals an alarming trend with respect to two overlapping groups of hosts, multiple-unit operators who are renting out two or more units, and full-time operators who are renting their unit(s) 360 or more days per year. These two subsets of operators are generating a substantial amount of Airbnb’s revenue. Hosts who rent fewer than 360 days, but still far more than occasionally (for instance, more than 180 days), also contribute greatly to Airbnb’s bottom line. (2, footnote omitted)
The authors clearly have an ax to grind with Airbnb, but their findings are interesting nonetheless. One of my takeaways from the report is how differently Airbnb operates in different markets.
In Miami, for instance, 61% of Airbnb’s revenues was derived from full-time hosts who made up 7% of its operators there. That is more than twice as much revenue (in percentage terms) from full-time hosts as Airbnb’s national average. Nationally, full-time hosts represented 3% of all hosts, less than half (in percentage terms) of the number in Miami. Clearly local conditions will drive local governments to regulate Airbnb differently. It will be interesting to watch it all unfold.
- HUD Secretary and the Surgeon General announced a proposed rule to make HUD’s public housing smoke-free, including prohibiting lit tobacco products such as cigarettes, cigars and pipes, in all units, indoor common areas, offices and outdoor areas within 25 feet of the buildings.
- Federal Circuit court affirms decision finding that a company’s loan shopping patents were too abstract and not eligible under Alice Corp. Pty. Ltd. v. CLS Bank International.
- Freddie Mac is dropping its $1.3 billion suit against Deloitte for its alleged complacency in the fraud and the eventual collapse of Taylor Bean & Whitaker Mortgage Corp., a mortgage lender.
- AIG claims that Goldman Sachs’ excess insurers are wrongly requesting application of New York law to the interest rate on a $1 million settlement that AIG must comply with under New Jersey law simply to access a more favorable interest rate.
January 22, 2016
Law360 quoted me in Cuomo’s DFS Nominee Likely To Keep Tough Edge (behind a paywall). It reads, in part,
Although New York Gov. Andrew Cuomo turned to a longtime BigLaw attorney to lead the New York State Department of Financial Services, observers say the agency is likely to continue taking the aggressive regulatory and enforcement stance that has become its calling card.
The governor tapped Paul Weiss Rifkind Wharton & Garrison LLP’s Maria T. Vullo to lead the DFS, completing a monthslong search to replace former New York Superintendent of Financial Services Benjamin M. Lawsky. In turning to Vullo, Cuomo brings on a litigator and former prosecutor with 25 years of experience in the law, including two decades of representing banks.
But given the reputation that the DFS has built up since it burst onto the scene with its $340 million sanctions violation settlement with the U.K.’s Standard Chartered PLC in 2012, advocates and observers believe that if confirmed, Vullo will continue to push for tough enforcement and big penalties against the banks, insurers and other financial firms that the DFS oversees.
However, because Vullo comes from a BigLaw background with extensive experience representing financial firms, some have raised concerns that the agency will become less aggressive in enforcing New York state’s financial regulations.But observers who spoke to Law360 said her noncorporate experience gives a clearer picture of how she might run the DFS.
Vullo has been an advocate for women in the legal profession and represented women who sued for damages after being raped during the war in Bosnia between 1992 and 1995, helping secure a $745 million verdict in that case.
And in her work for Cuomo during his tenure as New York’s attorney general, Vullo oversaw a staff of around 200 that worked in the office’s investor protection, antitrust, real estate finance, consumer fraud and Internet bureaus.
In that position, she took action against Ezra Merkin and Ivy Asset Management for their roles in defrauding investors in Bernard L. Madoff’s $65 billion Ponzi scheme, as well as launching an investigation and action against Ernst & Young for investor losses in Lehman Brothers Holdings Inc.’s 2008 bankruptcy.
Those past experiences should allay any fears that Wall Street’s critics might have, said David Reiss, a professor at Brooklyn Law School.
“I thought that Governor Cuomo would seek an aggressive replacement for Lawsky,” Reiss said. “Vullo fits the bill.”
To that point, financial reform and other advocates said in interviews that they knew little about her, but were encouraged by what they did know.
“What we’re hoping is that the reputation that the department has established will continue through the new leadership,” said Andy Morrison of the New Economy Project, a New York-based advocacy group.
Indeed, Cuomo has an interest in maintaining an aggressive DFS.
The billions of dollars in fines it collected from banks have gone to fund state infrastructure projects, including the construction of a new Tappan Zee Bridge across the Hudson River north of New York City.
And that get-tough approach has also been a way to attract voters.
“My sense is he benefits from the halo effects of an aggressive DFS,” Reiss said.