Prepayment penalties on subprime mortgages

As a result of the subprime mortgage mess, prepayment penalties are under close scrutiny. While these, like other kinds of contract terms, can be abused, there are good reasons for why they exist. In principle, they serve to extend credit to a greater number of borrowers.Mortgage loans ; Prepayment of debts

Homeownership for the long run: an analysis of homeowner subsidies

This paper examines the impact of interest-rate and down-payment subsidies on default rates and losses given default, and finds that down-payment subsidies create successful homeowners at a lower cost than interest-rate subsidies.Mortgage loans ; Default (Finance) ; Housing - Finance

The mortgage debacle and loan modifications

In today's increasingly sophisticated financial markets, loan modifications are often complex processes that involve multiple players with competing legal and financial interests. To better understand loan modifications, the Federal Reserve Bank of Cleveland hosted a one-day workshop in November 2007 featuring four financial and legal experts - Tony Saunders from Arizona State University, Steven Schwarcz from Duke University, Joseph Mason from Louisiana State University, and Kathleen Engel from Cleveland State University - who shared their knowledge and recommendations for possible solutions to the mortgage lending debacle.Mortgage loans

Theories of loan commitments: a literature review

A loan commitment is an agreement by which a bank promises to lend to a customer at prespecified terms while retaining the right to renege on its promise if the borrower's creditworthiness deteriorates. The contract also specifies the various fees that must be paid over the life of the commitment. Loan commitments are widely used in the economy. As their use has spread, a rich literature has evolved to explain why they exist, how they are priced, and how they affect the risk of the bank and the deposit insurer. This article summarizes what we have learned on these issues. Its main insight is that loan commitments are an optimal tool for risk sharing and for resolving informational problems. The author also points out some issues that the current literature leaves unexplained.Bank loans

Covered bonds: a new way to fund residential mortgages

Like the now government-owned Fannie Mae and Freddie Mac, large investment banks helped create funds to finance new mortgages by issuing securities backed by pools of existing mortgages. But private firms have abandoned these instruments, and with them a large source of mortgage funds has disappeared. Four large investment banks plan to create a new U.S. market for an old instrument, hoping to bring liquidity back to the mortgage market.Mortgage loans ; Mortgage-backed securities

Foreclosures: relationship lending in the consumer market and its aftermath

Relationship lending theory suggests that lenders in close proximity to their borrowers might be the most efficient providers of screening and monitoring services, because the cost of collecting information declines with distance. The author presents evidence that ties bank branch presence to borrower performance in the low-income housing market, which provides support for this theory.Branch banks ; Mortgage loans

Financial system structure and economic development: structure matters

This paper investigates how the structure of a financial system-whether it is bank- or market-oriented-affects economic growth. In contrast to earlier research, which indicated that the financial system's structure is irrelevant for growth, the author finds that countries grow faster when they have a flexible judicial system and more market-oriented financial systems.Economic development ; Financial institutions

Home price derivatives

Until recently, homeowners had no way to protect the value of their homes against losses that could result from housing market downturns. With the derivatives contracts introduced by the CME last year, homeowners now have some means of protection, and new and better products are more likely to follow from them.Housing - Prices

Legal systems and bank development

In some countries, banks are firms’ key source of financing. In others, firms look mainly to credit markets to meet their financial needs. Why should this be so? New research suggests that a country’s legal tradition strongly influences which financial system becomes dominant there.Banking law ; Finance

Securitization

Obscure just 20 years ago, loan portfolio securitization by private and government-sponsored enterprises is a $5 trillion business today. This Commentary explains the reasons behind the spectacular growth of asset-backed securities.Asset-backed financing