PUBLICATIONS

(previously titled: The Effect of Dealer Leverage on Mortgage Quality)

Securities dealers receive mortgages as collateral for credit lines provided to mortgage companies and reuse the same collateral to borrow money. Exploiting the 2005 BAPCPA rule change, which granted mortgage collateral preferred bankruptcy treatment, I find that strengthening creditor rights increases dealers' collateral reuse. Increasing collateral reuse creates a money multiplier that increases credit supply. Using a novel dataset linking dealers to the mortgage companies they fund reveals that post-BAPCPA, dealers supply additional credit to mortgage companies by increasing credit lines and relaxing restrictions on collateral securing them. In response, mortgage companies increase origination volume and shift into riskier products.

WORKING PAPERS

2. Capital Regulation and Asset Allocation Amidst Agency Conflicts: Evidence From Mortgage Servicing (with Naser Hamdi, Erica Jiang, Manisha Padi, and Avantika Pal)

We study the real impacts of capital regulation caused by the reallocation of mortgage servicing rights (MSRs). Using U.S. credit registry data, we show that Basel III’s stricter MSR regulation induced banks to transfer riskier MSRs, leading to a market-wide shift toward non-bank servicers. We develop a model showing that the privately optimal allocation of MSRs may not minimize agency conflict in a non-integrated mortgage market. Comparing foreclosure rates, a sufficient statistic for welfare in the model, we show that the reallocation of MSRs decreased agency conflicts and enhanced investor welfare at the expense of borrowers.

3. The Impact of Collateral Value on Mortgage Originations

This paper establishes that high income-volatility, minority borrowers were disproportionately exposed to the expansion of credit following the BAPCPA 2005 policy change, which granted preferred bankruptcy status to mortgage backed collateral in the sale and repurchase market. This shock only increased the collateral value of risky private-label mortgages. The paper documents that BAPCPA caused the sudden and disproportionate expansion of alternative mortgage products among high-income-variability minority-dominant zip codes leading up to the Global Financial Crisis. This over exposed vulnerable borrowers to mortgage payment shocks and higher levels of default during the crisis. Using a model of mortgage lending, I show that when the collateral value of alternative mortgages increases, lenders’ cost of capital decreases, leading them to decrease the price they charge to borrowers. If the price falls below the borrowers’ reservation price, lending expands in this market, consistent with a demand stimulation mechanism of BAPCPA. This paper provides insights on how to increase stability of private-label mortgages if they increase in volume, as they did in 2019. 

WORK IN PROGRESS

4. The Cost of Debt Servicing Pools (with Erica Jiang and Manisha Padi)


With the rise of securitization, 45% of US mortgages are not serviced by their originator, yet little is known about how loan servicers set their prices and the effect it has on loan performance. We provide novel evidence that the majority of servicers set their servicing fees at the average cost of servicing an entire pool of securitized loans. We calculate a risk based fair market value of the servicing fee at the loan level and document the wedge between the fair market value and the actual servicing fee. Consistent with servicers working harder to cure overpriced loans, we find that servicers increase foreclosures and decrease loan modifications when there is larger underpricing, making the actual servicing fee lower than the fair market fee. At the deal level, we find that larger underpricing negatively impacts investor cash flows.

5. The Real Effects of Capping Bank Leverage

In this paper, I study the effects of bank leverage ratio restrictions in a general equilibrium model of the macroeconomy where lenders can anticipate bank runs. This framework allows the analysis of the tradeoffs associated with bank capital requirements – while unlimited leverage allows capital to flow most freely to its most efficient users, limiting leverage through capital requirements reduces the probability of a bank run.  This model enables me to study the general equilibrium effects of these tradeoffs on household welfare to understand characteristics of the optimal bank leverage ratio requirement. I find that the optimal leverage restriction will be time varying across the business cycle. When the household’s marginal utility of consumption is highest, the leverage ratio requirement should be the least restrictive. Conversely, when the household’s marginal utility approaches its steady state level, the optimal leverage ratio becomes more restrictive.