Andra C. Ghent

Recourse and Residential Mortgage Default: Evidence from U.S. States

We quantify the effect of recourse on default. We find that recourse affects default through lowering the borrowers sensitivity to negative equity. At the mean value of the default option for defaulted loans, borrowers are 30% more likely to default in non-recourse states; for homes appraised at

Comparing Securitized and Balance Sheet Loans: Size Matters

500,000 to

Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009

750,000, borrowers are twice as likely to default in non-recourse states. We also find that, in states that allow deficiency judgments, defaults are more likely to occur through a lender-friendly procedure, such as a deed in lieu. We find no evidence that mortgage interest rates are lower in recourse states.

How Do Case Law and Statute Differ? Lessons from the Evolution of Mortgage Law

We assemble a unique data set of commercial mortgages with information on loan characteristics at origination and subsequent performance. The most significant difference between securitized and balance sheet loans is the size of the loan. The loans in the highest loan size decile have a 43% chance of securitization, whereas the ones in the lowest decile have only a 1% chance. This result is consistent with diversification being a key motivation for securitization. We also find that loans that require substantial monitoring are less likely to be securitized. Finally, securitized loans get resolved less quickly after defaulting. This paper was accepted by Neng Wang, finance.

Competition and Credit Ratings After the Fall

Young borrowers are the least experienced financially and, conventionally, thought to be most prone to financial mistakes. We study the relationship between age and financial problems related to credit cards. Our results challenge the notion that young borrowers are bad borrowers. We show that young borrowers are among the least likely to experience a serious credit card default. We then exploit the 2009 CARD Act to identify which individuals self-select into obtaining a credit card early in life. We find that individuals who choose early credit card use default less and are more likely to get a mortgage while young.

Complexity in Structured Finance

This paper traces the history of mortgage law in the United States. I explore the history of foreclosure procedures, redemption periods, restrictions on deficiency judgments, and foreclosure moratoria. The historical record shows that the most enduring aspects of mortgage law stem from case law rather than statute. In particular, the ability of creditors to foreclose nonjudicially is determined very early in states’ histories, usually before the Civil War, and usually in case law. In contrast, the aspects of mortgage law developed through statute change more frequently. This finding calls into question whether common law is inherently more flexible than the civil-law system used in some other countries. However, case law tends to be less responsive to populist pressures than statutes. My findings suggest that the reason common law favors financial development is unlikely to be its greater flexibility relative to law made by statute.

Second Mortgages: Valuation and Implications for the Performance of Structured Financial Products

We analyze the entry of new credit rating agencies into structured finance products. Our setting is unique as we study a period in which the incumbents’ reputation was extremely poor and the benefit of more fee income from inflating ratings was low. We find entrants issue higher ratings than incumbents, particularly for interest-only tranches. Using measures of market share that are exogenous to incumbent ratings, we provide suggestive evidence that incumbent rating levels become more generous as entrant market share in a product type increases. We also exploit a feature of structured finance that identifies rating shopping and find that incumbent ratings increase in shopping. The online appendix is available at https://doi.org/10.1287/mnsc.2016.2604. This paper was accepted by Gustavo Manso, finance.

Second Mortgages: Valuation and Implications for the Performance of Structured Financial Products: Second Mortgages

We study complexity in the market for securitized products, a market at the heart of the financial crisis of 2007–9. The complexity of these products rose substantially in the years preceding the financial crisis. We find that securities in more complex deals default more and have lower realized returns. The worse performance is economically meaningful: a one standard deviation increase in complexity represents an 18% increase in default on AAA securities. However, yields of more complex securities are not higher indicating that investors did not perceive them as riskier. Our results are consistent with complexity obfuscating security quality.

What's Wrong with Pittsburgh?

We provide an analytic valuation framework to value second mortgages and first lien mortgages when owners can take out a second lien. We then use the framework to value mortgage-backed securities (MBS) and, in particular, quantify the greater risk associated with MBS backed by first liens that have silent seconds"". Rating securities without accounting for the equity extraction option results in much higher ratings than warranted by expected loss. While the senior tranche’s rating should be A1 rather than Aaa in our benchmark calibration, the big losers from the equity extraction option are the mezzanine tranches who get wiped out.

Recourse and Residential Mortgage Default: Evidence from US States

We provide an analytic valuation framework to value second mortgages and first lien mortgages when owners can take out a second lien. We then use the framework to value mortgage-backed securities (MBS) and, in particular, quantify the greater risk associated with MBS backed by first liens that have silent seconds"". Rating securities without accounting for the equity extraction option results in much higher ratings than warranted by expected loss. While the senior tranche’s rating should be A1 rather than Aaa in our benchmark calibration, the big losers from the equity extraction option are the mezzanine tranches who get wiped out.