Tag Archives: bunching

Improving Minority and Low-Income Homeownership Experiences

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By ajay_suresh - Federal Reserve Bank of Chicago, CC BY 2.0, https://commons.wikimedia.org/w/index.php?curid=110893107

The Federal Reserve Bank of Chicago

I participated in a very interesting event at the Chicago Fed last week: Risk and Racial bias: Workshop improving Minority and Low-Income Homeownership Experiences. The Community Development and Policy Studies (CDPS) team at the Chicago Fed sponsored the workshop. CDPS is specifically focused on the risks of homeownership, bias in housing and financial markets, how risk and bias interact to affect homeownership experiences for minority or low-income families, and how risks are shared among market participants.

The workshop featured papers from “researchers in the social sciences and law using a range of methodological approaches on questions related to homeownership as a means of wealth accumulation and the experiences of minority and low-income families.”

I was a discussant for an interesting paper, Strategically Staying Small: Regulatory Avoidance and the CRA by Jacelly Cespedes et al. (she presented the paper). The abstract reads

Using the introduction of an asset based two-tiered evaluation scheme in the 1995 CRA reform, we examine the consequences of regulatory avoidance. Banks exploit the attribute-based regulation by strategically slowing asset growth, bunching below the $250M threshold. The regulatory avoidance also produces real effects. Banks near the threshold experience an increase in the rejection rate of LMI loans, while areas they serve experience a decline in county-level small establishment shares and independent innovation. These results highlight a bank’s willingness to take costly actions to avoid regulatory oversight and subsequent credit reduction for individuals whom the CRA is designed to benefit.

The most recent version of the paper does not seem to be publicly available, but an earlier draft can be found here.

 

Frannie Effects on Mortgage Terms

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The Federal Reserve’s Alex Kaufman has posted The Influence of Fannie and Freddie on Mortgage Loan Terms to SSRN.  It is behind a paywall on SSRN, but an earlier draft is available elsewhere on the web. The abstract reads,

This article uses a novel instrumental variables approach to quantify the effect that government‐sponsored enterprise (GSE) purchase eligibility had on equilibrium mortgage loan terms in the period from 2003 to 2007. The technique is designed to eliminate sources of bias that may have affected previous studies. GSE eligibility appears to have lowered interest rates by about ten basis points, encouraged fixed‐rate loans over ARMs and discouraged low documentation and brokered loans. There is no measurable effect on loan performance or on the prevalence of certain types of “exotic” mortgages. The overall picture suggests that GSE purchases had only a modest impact on loan terms during this period.

This is pretty dry reading, but it is actually an important project: “[g]iven the GSEs’ vast scale, the liability they represent to taxpayers, and the decisions that must soon be made about their future, it is crucial to understand how exactly they affect the mortgage markets in which they operate.” (2, earlier draft) The current conventional wisdom is that the two companies will return in something that looks like their pre-conservatorship form.

Given that that is the case, studies such as these are useful for providing some facts about the actual impact that these two companies actually have on the mortgage market.  In terms of their impact on loan terms, it appears that the two companies have a modest or even “mixed” effect, at least for the subset of mortgages studied. (22, earlier draft) And there “is no measurable effect on loan performance” at all. (22, earlier draft)

I have argued previously that returning Fannie and Freddie to their pre-conservatorship ways is a bad call. I still think that is the case. And I think studies such as these offer support for that view, in the face of the conventional wisdom.