Ruben Cox

Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households

This paper analyzes how financial literacy and reported willingness to take financial risk impact a household’s choice of mortgage type. The results show that households reporting higher financial literacy and lower risk aversion are 55 to 97 percent more likely to opt for interest-only mortgages. The results are robust to alternative explanations such as the involvement of financial advisors, the effect of peers, experience with prior home-ownership, and house price expectations. In general, alternative mortgage products, as opposed to traditional mortgages, are chosen by wealthier, older, and more sophisticated households that are more likely to have a greater understanding of the risks and benefits associated with these products.

Safe and Satisfied? External Effects of Homeownership in Rotterdam

The article analyses the impact of homeownership on neighbourhood safety and neighbourhood satisfaction, using a unique panel dataset for the city of Rotterdam. The results show that there are significant, but economically small, effects of homeownership on safety and satisfaction. Moreover, the relation between ownership and satisfaction is significantly moderated by neighbourhood safety. The paper examines whether the marginal impact of increases in homeownership on external effects diminish once ownership levels are higher. According to the data, this seems to be the case. The results are robust to alternative specifications. The findings provide insights for the evaluation of housing market policies that subsidise or stimulate homeownership.

Mortgage Insurance Adoption in the Netherlands

Individuals tend to underinsure on low probability, high consequence risks. Using a survey data set from a unique institutional context, we provide an assessment of the underinsurance puzzle by studying mortgage insurance adoption among Dutch homeowners. The results indicate that the demand for mortgage insurance is affected by risk exposure, type of mortgage lender, and the involvement of financial advisors. We document that wealthier and younger mortgagors are more likely to insure. However, locus of control, house price expectations, and precautionary savings are not related to insurance demand. Finally, we find evidence that borrower (over)confidence negatively affects the likelihood that insurance is bought.

What Do Investors Learn from Advertisements

Individual investors use advertisements to make investment decisions. We test how advertising content affects investor’s knowledgeability and evaluation of an equity offering. The results show that persuasive content (e.g. images) increases investor knowledgeability about fundamental characteristics of securities offerings while salient disclosure of risk factors only increases risk factor knowledge. Persuasive content also increases average investment amounts by 16 percent, while salient risk factor disclosure reduces the tendency to consult additional information. Our results are robust against differences in financial literacy and investor experience and provide insights for regulating investment marketing.

Regulatory Certification, Risk Disclosure and Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

Regulatory Certification, Risk Factor Disclosure and Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

The Effect of Salient Risk Disclosure and Regulatory Oversight on Investor Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

The Effects of Risk Framing, Balanced Information and a Regulatory Seal of Approval on Investor Perception and Behavior

Given the complexity of statutory disclosure (Beshears et al., 2011), we examine how the framing and balance in risk disclosure (e.g. vis-a-vis return information) and reference to regulatory approval of prospectuses in advertisements affect investor behavior. Using an experimental survey design with mock advertisements, we demonstrate that explicit risk disclosure increases investors’ risk perception by 5 percent, while balancing risk disclosure with other information decreases the search for additional information with 12 percent. We document strong ‘regulatory-seal’ effects as it increases willingness to invest by more than 10 percent, while decreasing perceived risks by almost 6 percent. Finally, we use inter-subject variation to show that willingness to invest is causally driven by the presence of a regulatory seal, the presence of which increases it by almost 17 percent.

Mortgage Risk Exposure and the Effect of Broker Involvement

Is there a conflict of interest between households and mortgage intermediaries when originators keep mortgages on their balance sheet? This paper shows that in an originate-to-hold setting, intermediaries are not systematically underwriting mortgages that exceed acceptable underwriting criteria (in terms of loan-to-value and debt-service ratios) once controlled for the originator. Originators have an incentive to monitor the underwriting process, regardless whether an intermediary is involved during origination. If mortgages are insured, than the involvement of intermediaries raises LTV-ratios by 6-7 per cent compared to mortgages directly originated at banks or insurers. It is further found that mortgage underwritten by intermediaries, are more likely to be of a deferred amortization type. Although this is not necessarily an adverse outcome for the household, the combination of deferred amortization debt and increased LTV-ratios is a potential risk for insurers of mortgages.This paper examines the effect of broker involvement on the LTV and DSR-ratios of mortgages. We show that after controlling for heterogeneity in underwriting standards among lenders, no marginal impact of brokers on debt-ratios is found, despite volume-based commission incentives. This is consistent with the idea that lenders only fund mortgages that conform to their credit standards, irrespective of broker involvement. Second, we test whether the availability of mortgage insurance alters these findings, as mortgage insurance can reduce loan screening and broker monitoring incentives in a similar fashion as securitization (Keys et al. 2010) through the transfer of credit risks. Again, the involvement of brokers is insignificant on debt-ratios. Our findings indicate that lender regulation is probably more effective in mitigating conflicts of interest between households and brokers, than changing compensation schemes or increasing broker regulation.

Overconfidence and Demand for Mortgage Insurance

Homeowners hold a large part of their wealth in real estate and finance it with (recourse) mortgage debt. Mortgage insurance is a means to insure wealth risk that emerges from the liability to repay in case of default. However, it is a well-known fact that individuals are overconfident in the sense that risk tends to be underestimated. We examine the relationship between overconfidence and the demand for mortgage insurance using an extensive survey dataset. We report that demand for insurance decreases by 11 to 13 percent if homeowners are one standard deviation more overconfident. These findings are robust against various alternative explanations such as prior experience with homeownership and the degree of portfolio diversification.This paper examines behavioral aspects of insurance adoption by households, applied to mortgage insurance. Using a comprehensive dataset, I show that households who are more financially literate, more financially active, less risk averse and those with a higher locus of control are significantly less likely to purchase mortgage insurance, whereas households with bequest motives are significantly more likely to obtain insurance. In general, it appears that households who choose not to insure exhibit a greater degree of confidence in their financial knowledge and control over the consequences of their actions. Since these behavioral explanations are not mutually exclusive, a joint-analysis is conducted and it is found that especially financial literacy and locus of control are strong predictors of insurance adoption. The results are not explained by local housing market conditions, presence of financial advisors or effects of peers. House price expectations, concerns about future prospects and the current financial situation of the household were found to be insignificant.