James D. Shilling

The Impact of the Agencies on Conventional Fixed-Rate Mortgage Yields

Between the early 1980s and 1986, the share of new conforming (under

Unconventional Monetary Policy and U.S. Housing Markets Dynamics

153,000 in 1986) conventional fixed-rate mortgages (FRMs) that went into Fannie Mae and Freddie Mac mortgage pools increased from under 5% to over 50%. The impact of these agencies moving from negligible participants to dominant players in this market is investigated in this study by an analysis of yields on 4,900 loans closed in California during May–June 1978 and 1,800 closed in May–June 1986.Our analysis indicates that the loan rate depends on the loan-to-value ratio, the loan size, and, in 1986, whether the loan is far above, just above, or below the conforming loan limit. Rates on loans far above the conforming loan limit exceed those on otherwise comparable loans below the limit by 30 basis points and those on loans destined to exceed the limit within a year by 15 basis points. That is, the expanded agency securitization of conforming FRMs has significantly lowered the rates on both conforming loans and loans somewhat above the conforming limit (27% of nonconforming loans in 1986) relative to what they would otherwise have been.

'REITarization' Effects on Global Real Estate Investments

This study investigates whether the unprecedented liquidity injected in the economy by the U.S Fed through unconventional monetary policy measure, popularly known as quantitative easing (QE), is a systematic factor that can explain the abnormally low U.S. housing starts of recent years. We use housing and mortgage markets data that should capture the liquidity induced by QE to construct four unobservable aggregate liquidity factors as key channels through which QE stimulus effects might have been transmitted to housing and mortgage markets. Using monthly MSA level data, we find that expected housing starts are related across time to fluctuations in the aggregate liquidity factors. Specifically, we find that housing starts liquidity betas, their sensitivities to liquidity shocks from QE transmitted through the aggregate liquidity factors significantly influence the level of U.S. investments in new single family housing between 2005 and 2012. However, we find evidence of heterogeneity in the responsiveness of housing starts to innovations in the aggregate liquidity factors in that market regimes with high levels of land use control (constrained markets) exhibit relatively muted sensitivities to fluctuations in the aggregate liquidity factors induced by QE. Remarkably, we also find that in the absence of GSE and FHA capital market activities that channel credit into housing market the contraction in housing starts would have been worse. Further, a build-up in single family homes-for-rent, shadow vacancy liquidity risk, exerts a down-ward pressure on investments in new single family housing.

Fiduciary Investment Under Uncertainty: Examining Pension Plan Investment Behavior When Trustees Have Reputational Utility

The creation of real estate investment trusts (REITs) facilitates the conversion of illiquid commercial real estate assets into liquid tradable securities in the public market space. The process increases liquidity and generates significant growth in cross-border real estate transactions. This study uses a large sample of proprietary commercial real estate transactions data from more than 73 countries within the sample period of 2001 through 2015. We investigate the impact of REIT creation on international real estate capital flows. Using non-REIT countries as the control group, we show that REITs open a new channel to attract institutional investments in real estate. New investments in real estate by both local institutional investors and foreign investors increase in REIT countries relative to non-REIT countries. The results imply that there is no substitution effects of REITs on private real estate market activities. We also find no evidence of “crowding out” effects on local investors, as we do not observe significant changes in the outflows of real estate capital. The relatively large increases in domestic real estate investments have caused declines in the shares of cross-border real estate capital flows in the post-REIT regime.The creation of real estate investment trusts (REITs) facilitates the conversion of illiquid commercial real estate assets into liquid tradable securities in the public market space. The process increases liquidity and generates significant growth in cross-border real estate transactions. This study uses a large sample of proprietary commercial real estate transactions data from more than 73 countries within the sample period of 2001 through 2015. We investigate the impact of REIT creation on international real estate capital flows. Using non-REIT countries as the control group, we show that REITs open a new channel to attract institutional investments in real estate. New investments in real estate by both local institutional investors and foreign investors increase in REIT countries relative to non-REIT countries. The results imply that there is no substitution effects of REITs on private real estate market activities. We also find no evidence of “crowding out” effects on local investors, as we do not observe significant changes in the outflows of real estate capital. The relatively large increases in domestic real estate investments have caused declines in the shares of cross-border real estate capital flows in the post-REIT regime.

Reforming Conforming Loan Limits: The Impact on Thrift Earnings and Taxpayer Outlays

Pension funds investment behavior have found to be persistent over time. Empirical findings of such persistence support conjectures that belief biases such as overoptimism and reputational concerns affect fiduciary investment behavior. Standard mean-variance analyses do not consider the implications of prudent-man laws on pension fund investment. We suggest an alternative way to derive pension portfolio choice by explicitly allowing pension trustee to make a joint belief-allocation choice in a utility function which takes an entropic form and considers investment objectives in a fiduciary environment. Our results demonstrate that pension trustees are inherently optimistic in forming projections but such optimism increases with the degree of risk-aversion. Further, the higher the level of risk-aversion, the more likely trustees will conform to peer group consensus and the less likely the consensus will change over time. This pattern of investment behavior seems consistent with empirical observations.

Oh Yes, They Will Reduce Housing Equity Under the Right Circumstances

In recent years, the conforming loan limit has risen rapidly (62 percent between 1985 and 1989 versus a 10 percent rise in the price of a constant-quality new house) and has assumed significant importance to homebuyers and portfolio lenders. Fannie Mae and Freddie Mac have become the price setters for comforming FRMs, and the yield being set appears to be 30 basis points below what it would otherwise be. The lower yield raises the old issue of overinvestment in housing, but its most important effect is on thrifts who now earn 30 basis points less on FRM investments under the conforming limit and who have difficulty originating ARMs. Moreover, given other thrift problems, taxpayers will apparently end up directly funding the interest income lost owing to low yields on conforming FRMs.In this article we calculate the impact on thrift interest income of two redefinitions of conforming loans: making all refinancings nonconforming and lowering the loand limit to the loan ceiling for FHA/VA loans (which was, in fact, the conforming limit prior to 1975). Each of these redefinitions makes sense from a public policy perspective. Thrifts would have earned nearly

The Economics of Tenure Choice: 1955-79

700 million more in 1987 had both redefinitions been in place at the start of 1986. This would have amounted to a 23 percent increase in the industry net operating income (income excluding profits or losses from the sale of assets) and a corresponding increase in return to equity. By the early 1990s, the income gain from these changes, had they been put in place in early 1986, would likely be over a billion dollars—certainly a noticeable saving for taxpayers.