Research

    (JOB MARKET PAPER)

Financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers have a contractual obligation to advance to the investors any monthly payments missed by borrowers. This paper shows that, in order to minimize this obligation to extend financing to distressed borrowers, constrained servicers aggressively pursued additional foreclosures and modifications at the expense of MBS investors, borrowers, and future mortgage performance. IV regressions suggest that servicers' financial constraints caused 440,712 additional foreclosures. A one standard deviation increase in servicer financial constraints led to an average reduction in investor value of $22,298 per loan–causing aggregate investor value destruction of $84 billion.



This paper describes an important borrower risk factor observed privately by the issuer of non-agency RMBS. The private information available to the issuer is drawn from behavioral cues exhibited early in the life of the loan. Mortgage borrowers that make their first six payments at least a day prior to the due date are 14.8 percentage points less likely to become delinquent (equivalent to a 91-point increase in FICO score). This effect is persistent, unobservable at loan origination, and privately observed by the issuer prior to securitization. Both the credit rating agencies and the investor do not appear to be aware of this risk factor. Surprisingly, issuers are quicker to securitize loans with positive private signals rather than less promising loans.



    (with Mark J. Garmaise and Gabriel Natividad)

We analyze competitive dynamics in the mortgage market. Using discontinuities in mortgage acceptance models to generate shocks to a bank's current local lending, we show that future applicants are attracted to growing lenders. Local mortgage markets resemble tournaments: a bank's originations are reduced by the lending of its quickest-growing competitors, not that of its overall competitors nor of its largest competitors. Moreover, future lending activity is convex in current originations. Tougher competition leads a bank to charge higher interest rates, partially due to the increased risk of its loans, and results in worse mortgage performance.