Financially Constrained Mortgage Servicers

Revise and Resubmit, Journal of Financial Economics

Cubist Systematic Strategies Ph.D. Candidate Award for Outstanding Research (2018 WFA)

Best Paper Award, Ohio State University PhD Conference on Real Estate and Housing (2018)

Financially constrained mortgage servicers destroyed substantial MBS investor value during the financial crisis through their management of delinquent mortgages. Servicers must advance to investors monthly payments missed by borrowers. This paper shows that, to minimize this obligation to extend financing to distressed borrowers, constrained servicers aggressively pursued foreclosures and modifications at the expense of investors, borrowers, and future mortgage performance. It is exactly when the agency frictions between the servicer and the investor are highest that the servicer's financial constraints matter to their decision making. IV regressions suggest that, on average, servicers' financial constraints were responsible for 20.21% of the total reduction in investor value per defaulted loan during the financial crisis.

The Economic Burden of Pension Shortfalls: Evidence from House Prices

(with Asaf Bernstein, Mahyar Kargar, Ryan Lewis, and Michael Schwert)

U.S. state pensions are underfunded by trillions of dollars, but their economic burden is unclear. In a model of inefficient taxation, real estate fully reflects the cost of these shortfalls when it is the only form of immobile capital. Thus, we study the effect of pension shortfalls on real estate values at state borders, where labor and physical capital can easily relocate to a state with a smaller shortfall. Using plausibly exogenous variation driven by pension asset returns, we find that one dollar of pension underfunding reduces house prices by approximately two dollars. Controlling for county-level rental rates as a proxy for current housing consumption does not affect our estimates, which suggests that house prices are affected by future costs rather than the current quality of public services. Our estimates imply a deadweight loss associated with addressing pension shortfalls that is consistent with prior research on the costs of public spending and taxation.

Competing for Deal Flow in Mortgage Markets

Under Review

(with Mark J. Garmaise and Gabriel Natividad)

The U.S. mortgage market exhibits competitive instability in which some lenders emerge rapidly from the fringe to substantial market shares. Using inferred discontinuities in application acceptance models to generate local lending shocks, we analyze the impact on a lender of a surge in originations by its competitors. We show that the quickest-growing (not the largest) competitors divert applications and originations from other lenders. Facing a quickly-growing competitor, banks charge higher interest rates, partially due to the increased risk of their loans. Loan performance suffers for other lenders as the quickest-growing competitor's originations increase.

Information Exploitation? A Pre-Crisis RMBS Issuer's Private Information

New version coming soon

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.