Research

 My Urban's page with current policy briefs and research reports: Link

My written blogs: Link


Current Research focus



Special purpose credit programs (SPCPs) have grown in popularity as a way for policymakers to allow lenders to offer credit to borrowers of protected classes. But how can lenders ensure that SPCPs help the households who need it most? Our research team built a toolkit that help lenders with the first steps of the process outlined by guidance from the Consumer Financial Protection Bureau (CFPB), particularly assessing the need for an SPCP through a broad market analysis.  

Link to the landing page: https://www.urban.org/projects/special-purpose-credit-program-data-toolkit


The notice of proposed rulemaking (NPR) by the three federal bank regulators—the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency—has significant implications for the future of mortgage lending to low- and middle-income (LMI) community by large banks with assets above $100 billion.

The proposal, among other provisions, would significantly increase capital charges for loans with high loan-to-value (LTV) ratios and at an excess to global capital standards set by the Basel III requirements and what is needed to maintain the safety and soundness of the financial system. 

Link to the research report: https://www.urban.org/research/publication/bank-capital-notice-proposed-rulemaking


There is a series of research studing CRA rule. 

An Assessment of CRA Lending to LMI and Minority Neighborhoods and Borrowers:

 https://www.urban.org/research/publication/assessment-lending-lmi-and-minority-neighborhoods-and-borrowers

Community Reinvestment Act Modernization: 

https://www.urban.org/research/publication/community-reinvestment-act-modernization

The Community Reinvestment Act Meant to Combat Redlining’s Effects:

https://www.urban.org/urban-wire/community-reinvestment-act-meant-combat-redlinings-effects-45-years-later-black


Early in the COVID-19 pandemic, policymakers initiated a forbearance program—that allowed borrowers to pause their mortgage payments—to prevent a large-scale foreclosure crisis. Using detailed loan-level performance data, we study forbearance take-up and subsequent performance among single borrowers versus coborrowers. 

Link to the research publication: https://www.sciencedirect.com/science/article/pii/S105113772200081X

or: https://www.urban.org/research/publication/single-borrowers-versus-coborrowers-pandemic



Selected Previous Published Research  


 Mortgages


Risk-based Capital Requirements for GSEs 

The research is based on The Federal Housing Finance Agency’s (FHFA’s) 2020 notice of proposed rulemaking (2020 NPR) for the government-sponsored enterprises’ (GSEs’) capital standards and finds that there are several issues of concern that will distort the relationship between capital and risk. The researchers offer a package of specific adjustments that will better align capital with risk. Better tying capital to risk will result in a better-regulated and stronger mortgage finance system.

Download: Research report 


Two- to four-family properties make up 19% of all rental housing but receive almost no attention. Using a unique dataset from Freddie Mac and Fannie Mae, we show that, for any given set of loan characteristics and compared with one-unit properties, two- to four-unit properties are more likely to default, its owner-occupied (investment) properties are less (more) likely to liquidate, and all two- to four-unit properties are more likely to have a higher loss severity upon liquidation. Historically, these patterns have led to higher losses on two- to four-unit loans. Current tighten credit results in loss rates much closer to those on one-unit owner-occupied properties, indicating that policymakers can relax the credit requirements of two-to-four properties to better serve affordable rental housing.


It’s a fact: women on average pay more for mortgages. Looking at loan performance for the first time by gender, however, we find that these weaker credit profiles do not translate neatly into weaker performance. In fact, when credit characteristics are held constant, women actually perform better than men. Nonetheless, since pricing is tied to credit characteristics not performance, women actually pay more relative to their actual risk than do men. Ironically, despite their better performance, women are more likely to be denied a mortgage than men. Given that more than one-third of female only borrowers are minorities and almost half of them live in low-income communities, we need to develop more robust and accurate measures of risk to ensure that we aren’t denying mortgages to women who are fully able to make good on their payments.

Veterans Administration (VA) loans have consistently performed better than Federal Housing Administration (FHA) loans. In this article, the authors take a closer look at both programs to identify why VA loans perform better. They conclude that the residual income test may be a critical differentiating factor and suggest that regulators evaluate whether the test might be a good supplement to the FHA’s current assessment of a borrower’s ability to pay.

The total number of purchase mortgages originated in 2012 is considerably less than half of peak levels and is down 44% from 2001 levels. The authors estimate that a large portion of the drop—as many as 1.2 million loans in 2012 alone—can be attributed to low credit availability and find that African-American and Hispanic borrowers have been disproportionately affected by the credit box tightening. An overly tight credit box means fewer individuals will become homeowners at exactly the point in the housing cycle when it is advantageous to do so, depriving these individuals of the chance to build wealth. It also means the housing market will recover more slowly, because there is a more limited pool of potential buyers for each home. Ultimately, it hinders the economy through fewer new home sales and less spending on furnishings, landscaping, renovations, and other consumer spending that goes along with home purchases.



Commercial Real Estate and CMBS

Theory and evidence are presented on how governance structure affects security design. Two types of frictions are isolated as they affect agent incentives to resolve financial distress: moral hazard in costly effort provision and risk-shifting incentives. A tension is shown to exist between the two effects, favoring a focus on one or the other depending on asset resale market conditions anticipated at the time of securities issuance. We show that, although effort provision is efficient with direct subordinate securityholder control over loan modification, there exist market conditions when concerns over risk-shifting costs predominate. As a result, governance mechanisms that limit risk shifting can be value enhancing. Empirical analysis of two distinct samples of commercial mortgage-backed securities issuances supports many of the model predictions, including the relative efficiency of junior security control over the workout specialist. We also empirically isolate the value-enhancing properties of specific governance mechanisms, the relative effects of which are time and market dependent.



HARP Refinance

This paper evaluates the effect of payment reduction on mortgage default within the context of the Home Affordable Refinance Program (HARP). We find that mortgage default is sensitive to payment reduction across univariate, duration, and hazard modeling approaches. A relative risk Cox model of default with time-varying covariates estimates that a 10% reduction in mortgage payment is associated with about a 10 to 11% reduction in monthly default hazard for loans. This finding is robust to the inclusion of empirically important mortgage risk drivers (such as current LTV and FICO score) as well as controlling for selection effects based on observables.

This paper examines the impact of refinancing on mortgage defaults based on an empirical investigation of the Home Affordable Refinance Program (HARP). We study a unique dataset from Freddie Mac which includes loans funded right before and after the HARP eligibility cutoff date, an exogenous event. Using a Fuzzy Regression Discontinuity Design method, we show that receiving a HARP refinance materially decreases the expected monthly default rate by about 48-62 percent using different bandwidth specifications.

 

HAMP Modification

As of January 2014, more than 1.1 million homeowners had received a permanent modification of their mortgages through the government’s Home Affordable Modification Program (HAMP), which began in 2009. The program was intended to help homeowners avoid foreclosure as housing prices sank and unemployment soared nationally. Under HAMP, loans were modified so that the borrowers’ housing expenses were equal to 31% of their gross monthly income, or a 31% “front-end” debt-to-income ratio (DTI). Most HAMP modifications involve interest rate reductions, and although HAMP modifications are called permanent, most of those reduced interest rates last for only five years. Recently, concerns have been raised that HAMP interest rate resets, which begin later in 2014, could cause many borrowers to default on their modifications, thus lowering the number of program successes. Moreover, because many proprietary modification programs were modeled on HAMP, such concerns extend beyond HAMP. In this article, the authors look at the reset issue and demonstrate that it will manifest itself initially in 2016 and will be less severe than others have predicted.



GSE Reform

This article examines the potential impact of increasing the guarantee fees that Fannie Mae and Freddie Mac (the government-sponsored enterprises [GSEs]) charge lenders. The authors argue that guarantee fees are very assumption driven. They then identify the three most important assumptions made in determining the fees. They conclude that transparency regarding these assumptions is critical and that, under any reasonable set of assumptions, the fees should not be increased for the least risky loans. The authors also argue that guarantee fees should be set high enough to cover expected losses under a stress scenario plus expenses. Beyond that, the GSEs’ mission should be taken into account in determining the required return on capital.

Obtaining a loan guaranteed by Fannie Mae and Freddie Mac is more difficult today than it was in 2001. While many factors have caused this change, the system of representations and warranties (reps and warrants), under which lenders can be forced to repurchase loans long after they are sold to the GSEs, is a hidden contributor. Recent efforts by Fannie and Freddie and their regulator to fix the problem should help, but there is room to give lenders greater assurance without harming Fannie and Freddie. And that assurance should translate into greater lender willingness to increase lending by expanding the “credit box.”

Over the past eight months, a broad consensus has been emerging as to what the future state of housing finance should look like. There are several plans, including the Corker–Warner bill, under which private-sector entities would continue to originate and service mortgages, with other private-sector entities providing credit enhancement for mortgage-backed securities (MBS). A public entity would be the guarantor of last resort, absorbing the catastrophic risk. The public entity would also provide the securitization platform as well as regulatory oversight. In all these plans, the government’s catastrophic coverage is meant to kick in under extraordinary circumstances; thus the amount of capital the private sector is required to invest must be sufficient to cover all but catastrophic conditions. This article demonstrates that collateral composition, house price experience, and diversification significantly affect credit risk, and thus the capital requirement. The authors’ empirical results demonstrate that 4%–5% capital would have covered Fannie Mae and Freddie Mac (the GSEs) using the 2007 experience. With the GSEs’ current book of business, that is too high, as collateral composition has changed in favor of much more pristine loans. The other important aspects of collateral composition are pool size and geographic diversity. Risk increases with smaller or less geographically diverse MBS pools. Investors are likely to be willing to take credit risk in MBS only if pools are large and geographically diverse. This will make loan-level, risk-based pricing more difficult. It is critical to calibrate the capital needs correctly; if capital requirements are too low relative to the credit risk, the catastrophic government guarantee will be invoked far more than should be the case. If capital requirements are too high, banks will respond by holding more high-quality loans in portfolio, shifting the ultimate credit risk of their lower-quality loans to the government.


Energy Efficiency

This article determines how the resale value of homes with PACE (Property-Assessed Clean Energy) improvements and financing compare with similarly situated homes that have no PACE involvement. The authors use a number of different methodologies to show that the net impact of PACE on resale value of a home, after taking into account the cost of improvements, ranges from $199 to $8,882. Moreover, the premium for PACE homes purchased out of foreclosure was closer to the higher end of the range. They conclude that a home with a subordinate PACE loan will provide collateral for FHA and GSE recoveries in a foreclosure sale that is at least as high as comparable properties without PACE improvements.