Wayne Passmore

Automated Underwriting and the Profitability of Mortgage Securitization

This paper develops a game-theoretic model of mortgage securitization, which is then used to examine a potential effect of automated underwriting. The papers primary supposition is that automated underwriting lowers the costs to competitive mortgage originators and a monopolist securitizer of identifying mortgage applicants who are good credit risks. Faced with lower underwriting costs, originators will screen a larger number of mortgage applicants in the hopes of holding more good risks in their portfolios and passing through more bad risks to the securitizer. This mounting adverse-selection problem causes the securitizers expected revenues to decline; this effect can outweigh the cost-saving benefit of automated underwriting, causing the securitizers return on equity to fall. Copyright American Real Estate and Urban Economics Association.

Do Savings Associations Have a Special Commitment to Housing

In this paper, we investigate whether elimination of the savings association charter might reduce lending to nontraditional mortgage borrowers. We present a theoretical model of lender portfolio choice, in which nontraditional lenders have some market power and traditional lenders are price takers in the mortgage market. The comparative statics indicate differences between nontraditional and traditional lenders in terms of their asset allocation responses to changes in borrower income and house prices. Empirical tests indicate the absence of such differences between savings associations and commercial banks, suggesting that elimination of the savings association charter would not impair lending to nontraditional mortgage borrowers.

Are Basel's Capital Surcharges for Global Systemically Important Banks Too Small?

The Basel Committee promulgates bank regulatory standards that many major economies enact to a significant extent. One element of the Basel III capital standards is a system of capital surcharges for global systemically important banks (G-SIBs). If the purpose of the surcharges is to ensure the survival of G-SIBs through serious crises (like the 2007-09 financial crisis) without extraordinary public assistance, our analysis suggests that current surcharges are too low because of three shortcomings: (1) the Basel system underestimates the probability that a G-SIB can fail, (2) the Basel system fails to account for short-term funding, and (3) the Basel system excludes too many banks from current surcharges. Our best estimate suggests that the current surcharges should be between 225 and 525 basis points higher for G-SIBs that are not reliant on short-term funding; G-SIBs that are reliant on short-term funding should have even higher surcharges. Furthermore, we find that, even with significant confidence in the effectiveness of other Basel III reforms, modest increases in surcharges appear needed.

Government-Backed Mortgage Insurance, Financial Crisis, and the Recovery from the Great Recession

The Great Recession provides an opportunity to test the proposition that government mortgage insurance programs mitigated the effects of the financial crisis and enhanced the economic recovery from 2009 to 2014. We find that government-sponsored mortgage insurance programs have been responsible for better economic outcomes in counties that participated heavily in these programs. In particular, counties with high levels of participation from government-sponsored enterprises and the Federal Housing Authority had relatively lower unemployment rates, higher home sales, higher home prices, lower mortgage delinquency rates, and less foreclosure activity, both in 2009 (soon after the peak of the financial crisis) and in 2014 (six years after the crisis) than did counties with lower levels of participation. The persistence of better outcomes in counties with heavy participation in federal government programs is consistent with a view that lower government liquidity premiums, lower government credit-risk premiums, and looser government mortgage-underwriting standards yield higher private-sector economic activity after a financial crisis.

Government-Backed Mortgage Insurance Promoted a Speedier Recovery from the Great Recession

The United Sates government has a long history of involvement in mortgage finance. During the 1930s, the government created the Federal Home Loan Banks (FHLB), the Federal Housing Administration (FHA), and the Federal National Mortgage Association (Fannie Mae).