- Inflation and Activity – Two Explorations and Their Monetary Policy Implications, Olivier J. Blanchard, Eugenio Cerutti & Lawrence H. Summers, HKS Working Paper No. 070.
- Real Estate Value Impacts from Fracking: Industry Response and Proper Analytical Techniques, Richard Roddewig & Rebel A. Cole, Real Estate Issues 39(3), 2014, 6–20.
- How Auctions Amplify House-Price Fluctuations, Alina Arefeva.
- Marketing and Product Description: Value Added in the Real Estate Market, Sebastien Gay & Allen T. Zhang.
- Strategic Information Disclosure and Bank Lending, Sumit Agarwal, Souphala Chomsisengphet & Qi (Susie) Wang.
- S. Bank Market Structure: Evolving Nature and Implications, David G. McMillan & Fiona Jayne McMillan.
- Before a Fall: Impacts of Earthquake Regulation and Building Codes on the Commercial Building Market, Levente Timar, Arthur Grimes & Richard Fabling.
- Demand and Supply of Mortgage Credit, Alex van de Minne & Federica Teppa, De Nederlandsche Bank Working Paper No. 486.
Tag Archives: credit
Credit Risk Transfer Deals
The Federal Housing Finance Agency released an Overview of Fannie Mae and Freddie Mac Credit Risk Transfer Transactions. It opens,
In 2012, the Federal Housing Finance Agency (FHFA) initiated a strategic plan to develop a program of credit risk transfer intended to reduce Fannie Mae’s and Freddie Mac’s (the Enterprises’) overall risk and, therefore, the risk they pose to taxpayers. In just three years, the Enterprises have made significant progress in developing a market for credit risk transfer securities, evidenced by the fact that they have already transferred significant credit risk on loans with over $667 billion of unpaid principal balance (UPB).
Credit risk transfer is now a regular part of the Enterprises’ business. The Enterprises are currently transferring a significant amount of the credit risk on almost 90% of the loans that account for the vast majority of their underlying credit risk. These loans constitute about half of all Enterprise loan acquisitions. Going forward, FHFA will continue to encourage the Enterprises to engage in large volumes of meaningful credit risk transfer through specific goals in the annual conservatorship scorecard and by working closely with Enterprise staff to develop and evaluate credit risk transfer structures. (2)
This is indeed good news for taxpayers and should reduce their exposure to future losses at Fannie and Freddie. There is still a lot of work to do, though, to get that risk level as low as possible. The report notes that these transactions have not yet been done for adjustable-rate mortgages or 15 year mortgages. Most importantly, the report cautions that
Because the programs have not been implemented through an entire housing price cycle, it is too soon to say whether the credit risk transfer transactions currently ongoing will make economic sense in all stages of the cycle. Specifically, we cannot know the extent to which investors will continue to participate through a housing downturn. Additionally, the investor base and pricing for these transactions could be affected by a higher interest rate environment in which other fixed-income securities may be more attractive alternatives. (22)
Taxpayers are exposed to many heightened risks during Fannie and Freddie’s conservatorship, such as operational risk. These risk transfer transactions are thus particularly important while the two companies linger on in that state.
Wednesday’s Academic Roundup
- Mortgage Finance and Technological Change, Robin Döttling & Enrico C. Perotti, Tinbergen Institute Discussion Paper 15-079/IV.
- Sustaining Neighborhoods of Choice: From Land Bank(ing) to Land Trust(ing), James J. Kelly Jr., Washburn Law Journal, Vol. 54, No. 3, 2015.
- President Eisenhower’s 1956 Prediction Becomes a Reality: The New Art of the REIT Spin, Katherine Riano, May 29, 2015.
- A Tale of Two Tensions: Balancing Access to Credit and Credit Risk in Mortgage Underwriting, Marsha Courchane, Leonard C. Kiefer & Peter M. Zorn, Real Estate Economics, Forthcoming.
- Loan Originations and Defaults in the Mortgage Crisis: Further Evidence, Manuel Adelino, Antoinette Schoar & Felipe Severino, June 21, 2015.
- How to Kill a Zombie: Strategies for Dealing with the Aftermath of the Foreclosure Crisis, Judith L. Fox, Notre Dame Legal Studies Paper No. 1519.
Wednesday’s Academic Roundup
- An Extrapolative Model of House Price Dynamics, Edward L. Glaeser & Charles Nathanson, HKS Working Paper No. RWP15-012.
- Old Suburbs Meets New Urbanism, Nicole Stelle Garnett, Notre Dame Legal Studies Paper No. 1512.
- Credit Scoring and Loan Default, Rajdeep Sengupta & Geetesh Bhardwaj, International Review of Finance Vol. 15, Issue 2, pg. 139-167, 2015. (Paid access).
- Product Market Effects of Real Estate Collateral, Azizjon Alimov.
- Reforming REIT Taxation (Or Not), Bradley T. Borden, Houston Law Review, Vol. 52, 2015, Forthcoming; Brooklyn Law School, Legal Studies Paper No. 416.
- Age, Demographics, and the Demand for Housing, Revisited, Richard K. Green & Hyojung Lee, June 4, 2015.
Friday’s Government Reports Roundup
- CFPB releases report of KPMG audit of its operations and budget. In the report, CFPB agrees with KPMG’s findings about control deficiencies and is aiming to fix such deficiencies.
- FHFA releases report on progress of Fannie/Freddie Conservatorships in advancing access to credit and loss mitigation/foreclosure prevention, among other improvements.
- Report from NYC Department of Investigation raises concerns for health and safety of those in homeless shelters.
- Report from the National Low Income Housing Coalition (NLIHC) claims: “Affordable Housing is Nowhere to be Found for Millions.
Wednesday’s Academic Roundup
- Regional House Price Segmentation and Convergence in the US: A New Approach by William Miles, Journal of Real Estate Finance and Economics, Vol. 50, No. 1, 2015.
- Impacts of Planning Rules, Regulations, Uncertainty and Delay on Residential Property Development by Arthur Grimes & Ian Mitchell, Motu Working Paper No. 15-20.
- Credit Supply and the Housing Boom by Alejandro Justiniano, Giorgio E. Primiceri, & Andrea Tamalotti, NBER Working Paper No. w20874.
- Rethinking the Tax-Revenue Effect of REIT Taxation by Bradley T. Borden, Florida Tax Review, Vol. 17, Issue 6, 2015, Forthcoming; Brooklyn Law Review, Legal Studies Paper No. 400.
- The Politics and Economics of Metropolitan Sprawl by William A. Fischel, Zoning Rules! The Economics of Land Use Regulation. Cambridge, Mass.: Lincoln Institute of Land Policy, 2015, Forthcoming.
- Property Law Conflicts by Joseph William Singer, 54 Washburn Law Journal 139 (2014) (discussing what law applies to real property case conflicts).
Hockett on NYC Eminent Domain
Bob Hockett has posted ‘We Don’t Follow, We Lead’: How New York City Will Save Mortgage Loans by Condemning Them to SSRN. The abstract reads,
This brief invited essay lays out in summary form the eminent domain plan for securitized underwater mortgage loans that the author has been advocating and helping to implement for some years now. It does so with particular attention in this case to New York City, which is now actively considering the plan. The essay’s first part addresses the plan’s necessity. Its second part lays out the plan’s basic mechanics. The third part then systematically addresses and dispatches the battery of remarkably weak legal and policy arguments commonly proffered by opponents of the plan.
Hockett has been advocating this plan for some time in the face of concerted opposition from the financial industry. One industry argument that I have found to be over the top is that lenders will refuse to lend in communities that employ eminent domain to address the foreclosure crisis. Hockett writes,
Another policy argument made by some members of the securitization industry is that using eminent domain to purchase loans will dry up the sources of mortgage credit, rendering the American dream of homeownership unattainable. The financial services industry and its legislative supporters have made this kind of claim against regulatory and consumer protection proposals emerging from national, state, or municipal legislatures.
One problem with this argument is that private credit has not flowed to non-wealthy mortgage borrowers since the crash. Federal lenders and guarantors are nearly the only game in town, and they are likely to remain so until the underwater PLS loan logjam is cleared.
Another problem with the credit withdrawal argument is that it characterizes a benefit as a burden. The housing bubble was, like most of the more devastating bubbles through history, the upshot of an over-extension of credit. Lenders extended excess credit through reverse redlining and other predatory lending practices perpetrated or aided and abetted by participants in the securitization industry itself. Hence the securitization industry’s warning that credit might not be overextended in the future is a warning of something that might well be desirable. (142-43, footnotes omitted)
Given that lenders always rush to lend to countries that have recently defaulted on their sovereign debt, I don’t find the credit withdrawal argument to be particularly convincing here. But it may succeed in convincing some local governments not to proceed with their eminent domain strategies. I do hope, however, that at least one locality will follow through during the current foreclosure crisis. That way, we will at least have a proof of concept for the next foreclosure crisis.
