Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

The U.S. mortgage market has experienced phenomenal change over the last 35 years. Most observers believe that the deregulation of the banking industry and financial markets generally has played an important part in this transformation. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on individuals and households. Our analysis is based on an implication of the permanent income hypothesis: that the higher a household’s future income, the more it desires to spend and consume, ceteris paribus. If we have perfect credit markets, then desired consumption matches actual consumption and current spending on housing should forecast future income. Since credit market imperfections mute this effect, we can view the strength of the relationship between housing spending and future income as a measure of the “imperfectness” of mortgage markets. Thus, a natural way to determine whether mortgage market developments have actually helped households by decreasing market imperfections is to see whether this link has strengthened over time. We implement this framework using panel data going back to 1969. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs’ activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as lowincome households and first-time homebuyers.

Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market

The U.S. mortgage market has experienced phenomenal change over the last 35 years. This paper develops and implements a technique for assessing the impact of changes in the mortgage market on households. Our framework, which is based on the permanent income hypothesis, that allows us to gauge the importance of borrowing constraints by estimating the empirical relationship between the value of a household's home purchase and its future income. We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects. One issue that has received particular attention is the role that the housing Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, have played in improving the market for housing finance. We find no evidence that the GSEs' activities have contributed to this phenomenon. This is true whether we look at all homebuyers, or at subsamples of the population whom we might expect to benefit particularly from GSE activity, such as low-income households and first-time homebuyers.

Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization

We document the fact that servicers have been reluctant to renegotiate mortgages since the foreclosure crisis started in 2007, having performed payment-reducing modifications on only about 3 percent of seriously delinquent loans. We show that this reluctance does not result from securitization: Servicers renegotiate similarly small fractions of loans that they hold in their portfolios. Our results are robust to different definitions of renegotiation, including the one most likely to be affected by securitization, and to different definitions of delinquency. Our results are strongest in subsamples in which unobserved heterogeneity between portfolio and securitized loans is likely to be small and in subprime loans. We use a theoretical model to show that redefault risk, the possibility that a borrower will still default despite costly renegotiation, and self-cure risk, the possibility that a seriously delinquent borrower will become current without renegotiation, make renegotiation unattractive to investors.

Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process

We evaluate laws designed to protect borrowers from foreclosure. We find that these laws delay but do not prevent foreclosures. We first compare states that require lenders to seek judicial permission to foreclose with states that do not. Borrowers in judicial states are no more likely to cure and no more likely to renegotiate their loans, but the delays lead to a build-up in these states of persistently delinquent borrowers, the vast majority of whom eventually lose their homes. We next analyze a “right-to-cure” law instituted in Massachusetts on May 1, 2008. Using a difference-in-differences approach to evaluate the effect of the policy, we compare Massachusetts with neighboring states that did not adopt similar laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.

Consumer Heterogeneity and Markups over the Business Cycle: Evidence from the Airline Industry

We analyze price dispersion in the airline industry in order to determine the e®ects of the business cycle on markup variations. We ¯nd that the cycle can a®ect the degree to which airlines can price discriminate between di®erent consumer types, ultimately a®ecting the degree of price dispersion. Performing a ¯xed-e®ects panel analysis on 17 years of data covering two business cycles, we ¯nd that price dispersion is highly procyclical. Estimates show that a rise in the output gap of one percentage point increases the interquartile range by 1.6 percent. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, the ¯rm can signi¯cantly raise the markup charged to those with high willingness to pay. Our analysis suggests that this impact on the ¯rm's ability to price discriminate imposes extra pro¯t risk to the ¯rm over and above cost variations.

Decomposing the foreclosure crisis: House price depreciation versus bad underwriting

We estimate a model of foreclosure using a data set that includes every residential mortgage, purchase-and-sale, and foreclosure transaction in Massachusetts from 1989 to 2008. We address the identification issues related to the estimation of the effects of house prices on residential foreclosures. We then use the model to study the dramatic increase in foreclosures that occurred in Massachusetts between 2005 and 2008 and conclude that the foreclosure crisis was primarily driven by the severe decline in housing prices that began in the latter part of 2005, not by a relaxation of underwriting standards on which much of the prevailing literature has focused. We argue that relaxed underwriting standards did severely aggravate the crisis by creating a class of homeowners who were particularly vulnerable to the decline in prices. But, as we show in our counterfactual analysis, that emergence alone, in the absence of a price collapse, would not have resulted in the substantial foreclosure boom that was experienced.

Price discrimination and business-cycle risk

A parsimonious theoretical model of second degree price discrimination suggests that the business cycle will affect the degree to which firms are able to price-discriminate between different consumer types. We analyze price dispersion in the airline industry to assess how price discrimination can expose airlines to aggregate-demand fluctuations. Performing a panel analysis on seventeen years of data covering two business cycles, we find that price dispersion is highly procyclical. Estimates show that a rise in the output gap of 1 percentage point is associated with a 1.9 percent increase in the interquartile range of the price distribution in a market. These results suggest that markups move procyclically in the airline industry, such that during booms in the cycle, firms can significantly raise the markup charged to those with a high willingness to pay. The analysis suggests that this impact on firms' ability to price-discriminate results in additional profit risk, over and above the risk that comes from variations in cost.

Making sense of the subprime crisis

This paper explores the question of whether market participants could have or should have anticipated the large increase in foreclosures that occurred in 2007 and 2008. Most of these foreclosures stemmed from loans originated in 2005 and 2006, leading many to suspect that lenders originated a large volume of extremely risky loans during this period. However, the authors show that while loans originated in this period did carry extra risk factors, particularly increased leverage, underwriting standards alone cannot explain the dramatic rise in foreclosures. Focusing on the role of house prices, the authors ask whether market participants underestimated the likelihood of a fall in house prices or the sensitivity of foreclosures to house prices. The authors show that, given available data, market participants should have been able to understand that a significant fall in prices would cause a large increase in foreclosures although loan-level (as opposed to ownership-level) models would have predicted a smaller rise than actually occurred. Examining analyst reports and other contemporary discussions of the mortgage market to see what market participants thought would happen, the authors find that analysts, on the whole, understood that a fall in prices would have disastrous consequences for the market but assigned a low probability to such an outcome.Subprime mortgage

Hypovitaminosis D in recent onset rheumatoid arthritis is predictive of reduced response to treatment and increased disease activity: a 12 month follow-up study.

BACKGROUND: Vitamin D displays immunomodulatory activities and has been proposed as a potential player in the pathogenesis of rheumatoid arthritis (RA). A negative association between serum 25(OH) vitamin D levels and RA activity was demonstrated but longitudinal studies investigating the role of vitamin D levels in predicting RA activity and response to treatment are lacking. Therefore, this study was designed to test the hypothesis of an association between serum 25(OH) vitamin D levels at RA diagnosis and disease activity evaluated by clinimetric, laboratory and ultrasound (US) parameters and to detect the prevalence of remission and response to treatment after 12 months follow-up. METHODS: This is a longitudinal, retrospective study on data obtained from thirty-seven patients with early RA treatment-naïve. Serum inflammatory markers, auto-antibodies and 25(OH) vitamin D levels were obtained at baseline. Hypovitaminosis D was diagnosed for 25(OH) vitamin D levels < 20 ng/ml. Tender joint count (TJCs), swollen joint count (SJCs), Visual Analog Scales (VAS), Disease Activity Score (DAS) 28 score were assessed at baseline and 12 months after diagnosis. Joints synovitis and power-Doppler were evaluated at baseline and 12 months later. RESULTS: At baseline mean 25(OH) vitamin D levels were 24.4 ± 11.9 ng/ml; 35% of study subjects had hypovitaminosis D which strongly associated with higher RA activity and lower prevalence of remission and response to treatment (all p-values < 0.001). The percentage of patients not presenting a reduction of the US synovitis score after 12 months from diagnosis was significantly higher among patients with hypovitaminosis D than in those with normal serum 25(OH) vitamin D at baseline. CONCLUSIONS: In patients with early RA and basal hypovitaminosis D after 12 months follow-up reduction of disease activity and percentage of remission and response to treatment were significantly lower than those observed in patients with normal vitamin D levels. These results provide further support to the immunomodulatory action of vitamin D in RA and suggest a role of basal vitamin D status in the prediction of disease evolution. Vitamin D measurement and possibly vitamin D supplementation should be considered an additional option in the management of early RA patients

A new dataset and empirical relationships between magnitude/intensity and epicentral distance for liquefaction in central-eastern Sicily

Strong earthquakes can trigger several phenomena inducing soil deformation, such as liquefaction, ground fracturing and landslides, which can often cause more damage than the seismic shaking itself. A research performed on numerous historical accounts reporting descriptions of seismogeological effects in central-eastern Sicily, allowed the authors to update the previous liquefaction datasets. 75 liquefaction-induced phenomena observed in 26 sites, triggered by 14 earthquakes, have been used to define relationships between intensity/magnitude values and epicentral distance from the liquefied sites. The proposed upper bound-curves, at regional scale for central- eastern Sicily, are realized by using the updating liquefaction dataset and also the new CPTI04 Italian earthquake parametric catalogue. These relationships can be useful in hazard assessment to evaluate the minimum energy of an earthquake inducing liquefactions