Current Unpublished Working Papers
Lending in Low- and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown
Community Developments WP 2008-05, FRBSF | With Reid | November 2008
Did Consumers Want Less Debt? Consumer Credit Demand Versus Supply in the Wake of the 2008-2009 Financial Crisis
2014-08 | With Gropp and Krainer | February 2014
We explore the sources of household balance sheet adjustment following the collapse of the housing market in 2006. First, we use microdata from the Federal Reserve Board’s Senior Loan Officer Opinion Survey to document that banks cumulatively tightened consumer lending standards more in counties that experienced a house price boom in the mid-2000s than in nonboom counties. We then use the idea that renters, unlike homeowners, did not experience an adverse wealth shock when the housing market collapsed to examine the relative importance of two explanations for the observed deleveraging and the sluggish pickup in consumption after 2008. First, households may have optimally adjusted to lower wealth by reducing their demand for debt and implicitly, their demand for consumption. Alternatively, banks may have been more reluctant to lend in areas with pronounced real estate declines. Our evidence is consistent with the second explanation. Renters with low risk scores, compared to homeowners in the same markets, reduced their levels of nonmortgage debt and credit card debt more in counties where house prices fell more. The contrast suggests that the observed reductions in aggregate borrowing were more driven by cutbacks in the provision of credit than by a demand-based response to lower housing wealth.
Prepayment and Delinquency in the Mortgage Crisis Period
2011-25 | With Krainer | September 2011
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 addition to the effects of declining house prices, tighter lending standards also may have played a role in weak prepayment activity.
Market Power and Relationships in Small Business Lending
2007-07 | January 2007
The empirical research literature regarding the effects of market structure on small business lending has yielded ambiguous results. This paper empirically tests for the presence of countervailing effects of increases in market concentration on small business loan volume. Countervailing
effects would be expected if both the traditional Structure, Conduct, Performance (SCP) paradigm of industrial organization and a paradigm whereby market power benefits the formation of lending relationships (the relationship hypothesis), are at work. Using Community Reinvestment Act (CRA) data on small loans to small businesses, it is found that, on average,
across MSAs, SCP effects dominate. But, as predicted by the relationship hypothesis, the negative effects of increases in concentration on small business loan volume are weaker, the greater the presence of young firms and the higher the business failure rate. Relationship effects due to business failure appear to come from highly concentrated MSAs. Endogeneity concerns are further addressed with the estimation of a regression that separates out the effects of changes in the number of lenders from the effects of changes in the sum of squared deviations of market shares.
The Potential Diversification and Failure Reduction Benefits of Bank Expansion into Nonbanking Activities
2000-01 | January 2000
Bank holding company (BHC) expansion into nonbank financial activities may increase or decrease the standard deviation of BHC ROA and/or the probability of bankruptcy of the BHC. Using individual firm data and a new application of a simulated merger methodology, I find the standard-deviation minimizing and bankruptcy-probability minimizing nonbank weights for a variety of nonbanking activities for two time periods, 1979-1986 and 1987-1997, for all BHCs and for large BHCs. I find that relatively substantial levels of investment in life insurance underwriting are optimal for reducing the standard deviation of BHC ROA. Appreciable levels of investment in life insurance underwriting, casualty insurance underwriting, and securities brokerage are optimal for reducing the probability of bankruptcy of the BHC.
Does the Community Reinvestment Act Cause Banks to Provide a Subsidy to Some Mortgage Borrowers?
FEDS WP 2002-19 | With Canner, Lehnert, and Passmore | April 2002
The Community Reinvestment Act (CRA) encourages lenders to make mortgage loans to certain classes of borrowers. However, the law does not apply to all lenders, and lenders do not necessarily receive credit for all loans made to borrowers of a particular class. We use this variation to test whether or not CRA-affected lenders cut interest rates to CRA-eligible borrowers; in other words, we test for the presence of a regulation-driven subsidy. Our theory suggests that loans made by commercial banks and savings associations (“relationship lenders”) and mortgage companies (“transaction lenders”) will differ from one another depending on borrower risk and homeownership benefits. Empirically, we find that CRA-eligible loans at CRA-affected institutions do carry lower mortgage spreads compared with other loans at the same institution. However, once we control for risk and benefit effects suggested by our theory, these differences in mortgage spreads become economically and statistically insignificant.
Published Articles (Refereed Journals and Volumes)
The CRA and Small Business Lending in LMI Areas During the Financial Crisis
Forthcoming in Selected Papers from the Small Business, Entrepreneurship, and Economic Recovery Conference | With Reid
Mortgage Loan Securitization and Relative Loan Performance
Journal of Financial Services Research, February 2013 | With Krainer
We compare the ex ante observable risk characteristics, the default performance, and the pricing of securitized mortgage loans to mortgage loans retained by the original lender. In our sample of loans originated between 2000 and 2007, we find that privately securitized fixed and adjustable-rate mortgages were riskier ex ante than lender-retained loans or loans securitized through the government sponsored agencies. We do not find any evidence of differential loan performance for privately securitized fixed-rate mortgages. We find evidence that privately securitized adjustable-rate mortgages performed worse than retained mortgages, although other observable factors appear to be more economically important determinants of mortgage default. We do not find any evidence of a compensating premium in the loan rates for privately securitized adjustable-rate mortgages.
Mortgage Lending on Native American Reservations: Does a Guarantee Matter?
Journal of Housing Economics 19, September 2010, 233-42 | With Reid
The Section 184 Indian Home Loan Guarantee Program provides lenders with a 100 percent guarantee for mortgage loans to Native Americans residing on reservations belonging to tribes that have chosen to participate in the program. We find that the Section 184 program does not increase approval rates for Native Americans overall, but does for Native Americans residing on trust land. However, this result disappears once tribe fixed effects are included in the regression, suggesting that underlying tribe characteristics correlated with the adoption of Section 184 are more important influences on loan decisions than is Section 184 per se.
Using County-Based Markets to Support and Federal Reserve Markets to Implement Bank Merger Policy
Journal of Competition Law and Economics 3(1), March 2007, 127-148 | With Pilloff
In this paper, we consider three issues raised by the apparent inconsistency between the current research practice of using county-based markets (Metropolitan Statistical Areas (MSAs) and non-MSA counties) to investigate the validity of the theoretical underpinnings of bank merger policy and the current regulatory practice of using Federal Reserve (FR) banking markets, which often do not follow county lines, to implement that policy. Using a national sample of bank and thrift branch deposit data, we find that county-based areas cannot simply substitute for FR markets in the implementation of bank merger policy. For example, numerous potential mergers would raise competitive issues in county-based areas, but not in FR markets, and vice versa. We also conclude that, because of the relative difficulty of assembling demographic data for non-county-based areas, it is impractical to consistently use FR markets in bank merger policy research. However, we do find that, despite the inconsistencies between the two types of markets, analysis that uses county-based areas is relevant for bank merger policy that is implemented with FR markets. For example, we find that profitability regression results using variables based on FR markets are similar to those found using variables based on MSAs and non-MSA counties.
Do Savings Associations Have a Special Commitment to Housing?
Journal of Financial Services Research 17(1), February 2000, 41-68 | With Passmore
The Role of Specialized Lenders in Extending Mortgages to Lower-Income and Minority Homebuyers
Federal Reserve Bulletin, November 1999, 709-726 | With Canner and Passmore
Home-purchase lending to lower-income and minority households and neighborhoods has expanded significantly and at a faster rate than lending to other borrowers in recent years. Over the same period, however, an increasing proportion of applicants for conventional home-purchase mortgages, including lower-income and minority applicants, have had their applications denied. The first trend often has been taken as evidence that lenders’ efforts to expand credit availability have been successful, whereas the second trend has contributed to concerns about access to credit and the fairness of the lending process. An important but little-recognized force behind the shift of credit toward lower-income and minority borrowers has been a rapid expansion of activity by subprime and manufactured-home lenders, lenders who are oriented toward lower-income and minority households. Using data collected under the Home Mortgage Disclosure Act (HMDA) from 1993 to 1998, this article finds that part of the growth in mortgage lending and most of the increase in denial rates are associated with the substantial and growing share of mortgage activity of institutions that specialize in subprime and manufactured-home lending.
Slow Business Start-ups and the Job Recovery
Economic Letter 2014-20 | July 7, 2014 | With Leduc
Small Businesses Hit Hard by Weak Job Gains
Economic Letter 2013-26 | September 9, 2013
Financial Data on Banks Headquartered by Region, June 2013
Regional Banking Tables | Aug 2013 | With Ford
Interest Rates on Loans, May 2013
Regional Banking Tables | Jul 2013 | With Ford
Financial Data on Banks Headquartered by Region, Mar 2013
Regional Banking Tables | May 2013 | With Ford
Interest Rates on Loans, Feb 2013
Regional Banking Tables | Apr 2013 | With Ford
Banking Markets in the Twelfth Federal Reserve District
Federal Reserve Bank of San Francisco Applications Resources | Mar 2013 | With Ford
Financial Data on Banks Headquartered by Region, Dec 2012
Regional Banking Tables | Feb 2013 | With Ford
Interest Rates on Loans, Nov 2012
Regional Banking Tables | Jan 2013 | With Ford
Financial Data on Banks Headquartered by Region, Sep 2012
Regional Banking Tables | Nov 2012 | With Ford
Interest Rates on Loans, Aug 2012
Regional Banking Tables | Oct 2012 | With Ford
Small Business Loans and Small Bank Health
Economic Letter 2012-26 | August 27, 2012
Mortgage Prepayment: An Avenue Foreclosed?
Economic Letter 2012-05 | February 13, 2012
Recent Trends in Small Business Lending
Economic Letter 2011-32 | October 17, 2011 | With Gillan
Out-of-Market Small Business Loans
Economic Letter 2009-07 | February 13, 2009
Small Business Lending and Bank Competition
Economic Letter 2008-15 | May 9, 2008
The Quantity and Character of Out-of-Market Small Business Lending
Economic Review | 2008
The Geographic Scope of Small Business Lending: Evidence from the San Francisco Market
Economic Letter 2006-36 | December 15, 2006
Changes in Twelfth District Local Banking Market Structure during a Period of Industry Consolidation
Economic Review | 2005
Has the CRA Increased Lending for Low-Income Home Purchases?
Economic Letter 2004-16 | June 25, 2004
Good News on Twelfth District Banking Market Concentration
Economic Letter 2003-31 | October 24, 2003
Increased Stability in Twelfth District Employment Growth
Economic Letter 2003-02 | January 31, 2003
Trends in the Concentration of Bank Deposits: The Northwest
Economic Letter 2002-21 | July 26, 2002
Subprime Mortgage Lending and the Capital Markets
Economic Letter 2001-38 | December 28, 2001
Small California Banks Holding On
Economic Letter 2000-14 | May 5, 2000
» View FRBSF Publications prior to 2000
The Untold Costs of Subprime Lending: Examining the Links Among Higher-Priced Lending, Foreclosures, and Race in California
In Proceedings of the 46th Annual Bank Structure Conference | Federal Reserve Bank of Chicago, 2010 | With Reid
This paper explores the relationship between race, subprime lending, and foreclosure in California in an effort to understand what happened during the subprime lending boom. The paper finds that communities of color have been disproportionately affected by the foreclosure crisis, and that these disparities stem from a series of complicated and interrelated factors, including borrower credit profiles, the ‘boom and bust’ housing market, and rising unemployment. However, the paper also shows that Blacks and Hispanics in California had access to very different mortgage markets, and that mortgage market channels played an important role in the likelihood of receiving a higher-priced loan. Once we control for the probability of obtaining a higher-priced loan, the differences in foreclosure rates among minorities and whites shrink considerably. This paper provides compelling evidence for the need to revisit consumer protection regulations and fair lending laws to ensure that minority borrowers aren’t unfairly being steered into different mortgage market channels.
CRA Lending during the Subprime Meltdown
In Revisiting the CRA: Perspectives on the Future of the Community Reinvestment Act | Federal Reserve Banks of Boston and San Francisco, 2009. 115-133 | With Reid