Jack M. Guttentag

The Strategy of Open Market Operations

I. The concept of open market strategy, 2. — II. The money market strategy, 3. — III. Recommendations for procedural change, 20 — IV. Recent tendencies in open market strategy, 26. — V. Concluding comment, 30.

Disclosure policy and international banking

Abstract We develop general principles to guide the compulsory public disclosure of information about the financial condition of banks and apply these principles to three issues of particular relevance in international banking: (1) the disclosure of the country risk exposure of individual banks, (2) the rationale for hidden reserves, and (3) the disclosure of information regarding the availability to individual banks of emergency liquidity assistance. Our analysis shows why disclosure standards vary from country to country and why disclosure standards in the U.S. go well beyond the requirements elsewhere.

Balance Requirements and Deposit Competition

M ANY banks require business customers to hold deposits with them as a condition for extending loans or lines of credit. Although several aspects of these so-called compensating balance requirements have been explored, such as their impact on the supply of credit and on interest rates, their relationship to the structure of the market for bank loans has never been satisfactorily explained. The purpose of the present note is to fill this gap. In our view the hypothesis with the greatest explanatory value is that compensating balance requirements arise out of bank competition for business customers who would ordinarily hold large balances voluntarily. After exploring this hypothesis and some of its implications, we consider balance requirements under monopoly and under oligopolistic collusion.

When will residential mortgage underwriting come of age

Abstract Residential mortgage underwriting practice has serious shortcomings, including fixation on the present rather than the future. Accept‐reject decisions reflect some unknown interaction among implicit macro projections, implicit micro projections, and implicit policy toward assuming risk, and there is no way to relate the decision process to its components. As a result, there is no satisfactory way for a lender to incorporate a particular macro‐economic outlook into its underwriting standards. Further, different mortgage designs often carry markedly different degrees of risk. Most critically, accountability for underwriting decisions is obscured. This paper proposes a fundamentally new approach to underwriting that makes full use of new technology. Under this approach, macro and micro projections of the future and the lenders policy toward risk are explicitly specified. The accept‐reject decision is automatic and transparent. Each of the parties responsible for the components of underwriting decis...

Affordability and mortgage design: Permanent buydowns and buyups

Abstract A simulation model that mirrors the actual practices of lenders in setting qualification requirements for mortgage loans is used to assess the impact of permanent buydowns and buyups on the maximum sale price that buyers can afford. Buydowns are reductions in the coupon rate traded off against higher discount points; buyups are the reverse. Although buydowns have little effect on afford ability, buyups can have significant effects. Their potential is largely unrealized, however, because of the call risk to lenders of loans carrying premiums. The authors propose a “discount recovery” provision, which would be similar to a prepayment penalty except that the payment upon prepayment would be tied to the amount of the discount foregone by the lender. This would protect lenders against call risk, giving them every reason to offer buyups as a way of expanding demand.

Temporary Buydowns and Affordability

This paper is directed to a neglected aspect of the problem of home ownership affordability: the impact on affordability of temporary buy downs. A temporary buydown is an option offered to home buyers to reduce the mortgage payment in the early years of the loan. The borrower allocates cash up front to an escrow account from which funds are withdrawn monthly to supplement the borrowers mortgage payment.Temporary buydowns are underused partly because of the difficulty of determining whether, in any particular case, they will increase affordability. This paper develops a new instrument called the maximum affordable mortgage (MAX) which automatically allocates the buyers available cash between buydown, down payment and other uses in a manner which maximizes affordability for the buyer, subject to whatever underwriting constraints the investor wishes to impose on payment graduation and/or the total size of the buydown.The lender originating the MAX must be able to solve a complex algorithm at the point of sale, but the complexity is all behind the scenes. Using a computer, a loan officer can quickly find the cash allocation that maximizes affordability. The power of the MAX in increasing affordability may be enhanced if it is combined with a buyup wherein the lender trades off lower points against a higher rate. Copyright American Real Estate and Urban Economics Association.

Strategic Planning by International Banks to Cope with Uncertainty

This paper is a preliminary effort to develop principles and methods that will allow international banks to deal with uncertainty regarding major shocks. When a bank fails, or suffers enormous losses, it is often because it paid insufficient prior attention to a hazard that it might have avoided or mitigated. We believe the strategic planning function should include responsibility for anticipating and developing defensive strategies against such hazards. In this paper we consider how this can be done.