Search Results
Journal Article
The current strength of the U.S. banking sector
Journal Article
What determines the credit spread?
Although the swings in economic measures during the last recession and recovery were fairly modest, swings in financial markets were quite large. Once financial markets found their footing, after steep losses in 2000-2002, prices on virtually all traded financial claims rose as the economic outlook improved. This pattern was particularly true in the corporate bond market. In this Economic Letter I describe the significant narrowing of bond spreads across different sectors and ratings classes since the last recession. I also discuss recent research on the determinants of relative pricing in ...
Journal Article
Retail sweeps and reserves
Working Paper
Subprime mortgage delinquency rates
We evaluate the importance of three different channels for explaining the recent performance of subprime mortgages. First, the riskiness of the subprime borrowing pool may have increased. Second, pockets of regional economic weakness may have helped push a larger proportion of subprime borrowers into delinquency. Third, for a variety of reasons, the recent history of local house price appreciation and the degree of house price deceleration may have affected delinquency rates on subprime mortgages. While we find a role for all three candidate explanations, patterns in recent house price ...
Working Paper
Prepayment and delinquency in the mortgage crisis period
We study the interaction of borrower mortgage prepayment and mortgage delinquency during the period between 2001 and 2010. We show that when house prices flattened and began their subsequent decline, borrowers had increasingly slow prepayments and that this decline in prepayment rates roughly coincided with the sharp increase in their delinquency rates. Low credit score borrowers, in particular, display a pronounced negative correlation between default rates and prepayment rates. Shortfalls of actual prepayment rates from predicted rates based on an estimated prepayment model suggest that, in ...
Working Paper
Safe Collateral, Arm's-Length Credit : Evidence from the Commercial Real Estate Mortgage Market
When collateral is safe, there are less opportunities for things to go wrong. We examine matching between collateral and creditors in the commercial real estate mortgage market by comparing loans in commercial mortgage backed securities (CMBS) conduits and bank portfolios. We model CMBS financing as lower cost but less informed, such that only safe collateral is funded by CMBS. This prediction is tested using the 2007-2009 shutdown of the CMBS market as a natural experiment. The loans funded by banks that would have been securitized are less likely to default or be renegotiated, indicating ...
Working Paper
Mortgages as Recursive Contracts
Mortgages are one-sided contracts under which the borrower may terminate the contract at any time, while the lender must commit to honoring the terms of the contract throughout its life. There are two aspects to this feature of the contract that are modeled in this paper. The first is that the borrower may choose between buying a house or renting. Given these alternatives, a contract between a household and a lender makes home ownership feasible, and provides insurance to the household against fluctuating rental payments. The second is that once in a contract, the household may terminate the ...
Journal Article
Banking and the business cycle
Journal Article
Aggregation in bank stress tests
How well stress tests measure a bank?s ability to survive adverse conditions depends on the statistical modeling approach used. Banks can access data on loan characteristics to precisely estimate individual default risk. However, macroeconomic scenarios used for stress tests?as well as the reports banks must provide?are for a bank?s entire portfolio. So, is it better to aggregate the data before or after applying the model? Research suggests a middle-of-the-road approach that applies models to data aggregated at an intermediate level can produce accurate and stable results.
Journal Article
House prices and subprime mortgage delinquencies
In this Economic Letter, we explore how the pace of and change in house-price appreciation can affect the incentives and opportunities for borrowers in a market to avoid delinquencies and foreclosures. For instance, with likely gains in home equity in markets where house prices have risen significantly, a homeowner should have greater incentives and opportunities to keep a mortgage loan current. Indeed, we show that markets that recently experienced greater house-price appreciation tended to have lower delinquency rates and smaller increases in delinquency rates. We also find that ...