Seller Financing: Contracting Out of the Lemons and Moral Hazard Problems When They May Co-Exist

Quality problems that are known to the seller of an asset, but will become known to the buyer only after the purchase have the potential to frustrate voluntary exchanges. When the problem is subtle or confounded by the extent of buyer inputs, requiring risk-sharing by the contracting parties, both parties would benefit from a mechanism, such as seller financing, which not only credibly signals to the buyer the veracity of the seller’s representations about the asset (s)he is trying to sell, but also offers the seller sufficient protections against the potential that the buyer may engage in post-sale opportunistic behavior about the maintenance of the asset. We analyze one-time-only mortgage contracts in the National Association of Realtors\u27 Home Financing Transaction database for 1984-1996, (data not collected outside this period), and find empirical support for seller financing as an asset quality signal and, separably, as a mechanism for providing credit when conventional credit sources are tight. We also point out the broad, but not well-acknowledged, reach of seller financing, including the sub-prime loan debacle, the earnout mergers or reverse annuity mortgages, which are inherently embedded with both asymmetric information about the quality of the relevant assets and moral hazard about the asset acquirer’s post-purchase maintenance

Reits' Growth Options and Asset Pricing Dynamics across Time

Our paper makes two empirical contributions on REITs' asset pricing over three sequential and mutually exclusive time periods. The first yields the beta estimates of (i) assets, (ii) growth options and (iii) assets-in-place, embedded in the valuations of REITs. We develop a new approach to estimate the latter two betas and, to our knowledge, provide the first-ever REIT evidence on them. The second investigates the evolving roles, from a capital markets viewpoint, of the four pricing factors of the Carhart model on REITs' portfolio returns. In each investigation, we clean out, when needed, the unprecedented and overwhelming effects of GFC and the Eurozone bailout crisis. Our main results show that (i) the betas of growth options are larger than those of assets-in-place, raising a question mark about the 'income stock' description of REITs, (ii) the estimates of the equity beta for REITs are always positive and very highly significant, not consistent with the reports of the 'death of beta' from the mainstream finance literature, (iii) the capital markets' one-year momentum measure does not affect REITs' portfolio returns, and (iv) REITs exhibit a lot of progress in integration into the capital markets

Banking Geography and Cross-Fertilization in the Productivity Growth of US Commercial Banks

The US banking industry offers a unique, natural and fertile environment to study geography's effects on banks' behavior and performance. The literature on banks' operating performance, while extensive, says little about the influence of spatial interactions on banks' performance. We compute and examine, using a physical distance-based spatio-temporal empirical model, the state-wide total factor productivity growth (TFPG) indices of US commercial banks for each state for the 1971-1995 period. We observe that the productivity growth of commercial banks in state i depends strongly, positively, and contemporaneously on the productivity growth of commercial banks located in state i's contiguous states. Further, “regulatory space” appears to induce frictions and lessen the documented spatial interactions. These findings support our plea that research on commercial banking sector's behavior need to pay a particular attention to the effects of banking geography.Spatial, Commercial Banks, Total Factor Productivity Growth, Kalman Filter

Banking geography and cross-fertilization in the productivity growth of US commercial banks

The US banking industry offers a unique, natural and fertile environment to study geography's effects on banks' behavior and performance. The literature on banks' operating performance, while extensive, says little about the influence of spatial interactions on banks' performance. We compute and examine, using a physical distance-based spatio-temporal empirical model, the state-wide total factor productivity growth (TFPG) indices of US commercial banks for each state for the 1971-1995 period. We observe that the productivity growth of commercial banks in state i depends strongly, positively, and contemporaneously on the productivity growth of commercial banks located in state i's contiguous states. Further, regulatory space appears to induce frictions and lessen the documented spatial interactions. These findings support our plea that research on commercial banking sector's behavior need to pay a particular attention to the effects of banking geography

Seller Financing: Contracting Out of the Lemons and Moral Hazard Problems When They May Co-Exist

Quality problems that are known to the seller of an asset, but will become known to the buyer only after the purchase have the potential to frustrate voluntary exchanges. When the problem is subtle or confounded by the extent of buyer inputs, requiring risk-sharing by the contracting parties, both parties would benefit from a mechanism, such as seller financing, which not only credibly signals to the buyer the veracity of the seller’s representations about the asset (s)he is trying to sell, but also offers the seller sufficient protections against the potential that the buyer may engage in post-sale opportunistic behavior about the maintenance of the asset. We analyze one-time-only mortgage contracts in the National Association of Realtors' Home Financing Transaction database for 1984-1996, (data not collected outside this period), and find empirical support for seller financing as an asset quality signal and, separably, as a mechanism for providing credit when conventional credit sources are tight. We also point out the broad, but not well-acknowledged, reach of seller financing, including the sub-prime loan debacle, the earnout mergers or reverse annuity mortgages, which are inherently embedded with both asymmetric information about the quality of the relevant assets and moral hazard about the asset acquirer’s post-purchase maintenance.  </p

Australia's Economic Response to the Global Financial Crisis and Its Housing Markets

Dogan Tirtirogluhttp://trove.nla.gov.au/work/15214467

Australia's Economic Response to the Global Financial Crisis and Its Housing Markets

This chapter presents a summary of the Australian banking and real-estate markets. It further discusses the policy developments used to fight off the adverse expected consequences of the global financial crisis (GFC). The chapter concludes with a review of the current state of both the markets. Essentially, there is a consensus that Australia's response to the GFC has been a success story so far. As for housing, the policymakers have implemented policies as part of a massive fiscal response package to the GFC, which has aimed to sustain high property values in Australia. Therefore, relatively low mortgage rates have allowed all potential home-owners to maintain a healthy appetite for purchasing houses. In addition, Australian banks have been sourcing their financing needs mainly from the international markets for some time now. Inflationary pressures are a likely outcome of the massive budget deficits around the world, once the world economies pull themselves out of the GFC. Further, the Australian economy has its own homemade concerns for inflation. Thus, increasing borrowing costs, both domestically and internationally, for Australian banks and, consequently, for all Australian mortgage borrowers with a VRM contract, are not unlikely in the near future.</p