(previously titled: The Effect of Dealer Leverage on Mortgage Quality)
AEA 2022: Poster Presentation
Accepted at the Journal of Financial Economics
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.
2. The Impact of Collateral Value on Mortgage Originations [DRAFT COMING SOON]
In a model of contracting between a mortgage borrower and lender, we show that when the lender's outside option decreases, she lends to a new, previously dominated, market. The optimal mortgage contract in this market has an alternate structure relative to the standard market. We map the decrease in the outside option to a of strengthening creditor rights on mortgage-backed collateral in 2005. Following this change, we show empirically that lenders increase lending to high-income-variability borrowers using alternate mortgage products. The model offers insight into the sudden expansion of negative amortizing mortgage products leading up to the Great Financial Crisis, the products' ensuing defaults, and has implications for minority borrowers.
3. The Rise of Shadow Banks in Servicing Household Debt (with Erica Jiang, Manisha Padi, and Avantika Pal)
Using a near universe of consumer credit records,Using a near universe of consumer credit records, Using a near universe of consumer credit records, we document a massive increase in transfers of mortgage servicing rights (MSR) from banks to shadow banks following the announcement of a higher risk weight on banks’ MSR assets in Basel III. We document that banks selectively transfer below median income, subprime, 60+ day delinquent, and minority zip code borrowers’ MSRs to shadow banks following Basel III. Banks retain rights to service loans originated to high credit score borrowers in zip codes with higher white populations. Relative to banks, shadow banks provide fewer modifications and experience deteriorating loan performance following the rule change. Shadow bank servicers provide less liquidity to borrowers who lose their jobs, relative to banks. Our results suggest that the rise of shadow bank servicing worsened existing disparities in loan performance along dimensions of race and income, and may have increased aggregate financial risks.
WORK IN PROGRESS
4. 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.