Richard J. Buttimer

The Adjustable Balance Mortgage: Reducing the Value of the Put

We propose a new mortgage contract that endogenously captures the risk of house price declines to minimize default risk resulting from changes in the underlying asset value while still retaining contract rates near the cost of a standard fixed‐rate mortgage. By reducing the role of the legal system in mitigating house price risk, the new mortgage reduces the negative externalities and social costs arising from defaults. In other words, the new mortgage minimizes the need to use the legal foreclosure system to deal with the economic risk of house price declines.

Commercial Real Estate Valuation, Development and Occupancy Under Leasing Uncertainty

A model of commercial property valuation is developed where individual property owners are price takers and tenants randomly arrive and depart. Spot lease and tenant reservation prices are stochastic and correlated and can divert from but eventually revert back to market equilibrium. Within this framework we examine built property values and vacancy rates for varying parameter sets representing differing markets and economic conditions. We also examine how potential and existing vacancies, spot lease prices and tenant reservation prices feed back into development decisions. We demonstrate how preleasing acts as a hedge to the developer against the risk of leasing uncertainty.

The financial crisis: imperfect markets and imperfect regulation

Purpose - This paper seeks to examine the role that regulation and regulatory agencies played in the creating of the subprime mortgage market, and the subsequent crash of the mortgage market. The paper has two goals. First, it seeks to document the degree to which the US housing markets, and the US housing finance market, were regulated prior to the crash. Second, it seeks to show that regulatory bodies set policies which created both incentives and explicit requirements for Fannie Mae and Freddie Mac, as well as depository institutions, to enter the subprime market. Design/methodology/approach - The paper examines the regulatory environment of the subprime market. It uses regulatory filings and other documents as primary sources. Findings - The popular perception that the subprime mortgage market arose because housing finance was largely unregulated is incorrect. In point of fact, the housing finance market was very heavily regulated. Indeed, the paper shows that the creation of the subprime market was a formal goal of the federal government, and that federal regulatory agencies explicitly required participation by the Government Sponsored Enterprises (GSEs). Originality/value - The papers primary implication is that incentive conflicts within the US housing finance system significantly contributed to the mortgage crisis. These incentive conflicts were not just within private firms, but also extend to the GSEs and regulatory agencies. Regulatory agencies not only failed to anticipate the crisis; they actively encouraged the policies which created it. As a result, the primary focus of reform efforts should be on identifying and eliminating such conflicts.

REIT performance and market timing ability

Purpose - The purpose of this paper is to study performance and market timing ability of equity real estate investment trusts (REITs). Design/methodology/approach - The authors use classical regression-based framework and their multi-index, multifactor, and conditional extensions to jointly detect asset selectivity and market timing ability of equity REITs and their subcategories. These results are then validated by a nonparametric test. Findings -It is found that equity REITs in aggregate have some housing market timing ability. Various equity REIT subcategories perform differently: office REITs can discover underpriced properties, while retail, industrial, and office REITs have poor timing ability. Nonparametric tests confirm that equity REITs do not have ability to predict real estate market movements. Originality/value -Research in REIT performance evaluation is still limited to the asset selectivity aspect. This paper intends to fill this gap by providing empirical evidence of market timing ability of equity REITs using an array of parametric and nonparametric methods.

An Examination of the Role of Security Clauses and Deposits in Residential Lease Contracts

This paper argues that security clauses in lease contracts create a contingent claim on the value of the leased property, which resembles a put option on common stock. Adapting the standard results from option pricing theory gives insight into how landlords determine security deposit amounts, which serve to guarantee performance of the contract. Empirical tests show that deposit amounts are affected by the propensity of a property to be damaged, the propensity of a tenant to cause damage, and other characteristics of the landlord-tenant relationship. Two-stage least squares and probit regression estimates, however, provide only limited evidence to suggest that advance deposits significantly reduce tenant damages in the residential rental market.

A Contingent Claims Analysis of Real Estate Listing Agreements

This article examines real estate brokerage contracts as contingent claims. It derives terminal and boundary conditions for this contract. A Nelson and Ramaswamy (1990) style lattice is then developed to solve the partial differential equation for the value of the listing agreement. After identifying various parameters that determine the contracts value, those parameters are varied to examine their relative impact on the contract.