From Origination to Renegotiation: A Comparison of Portfolio and Securitized CRE Loans
Forthcoming in Journal of Real Estate Finance and Economics | With Black and Nichols
This paper provides a comparison of portfolio and securitized commercial real estate loans with a focus on differences in the ability to renegotiate distressed loans. We test the hypothesis that borrowers with riskier collateral will prefer portfolio lenders who have greater flexibility in renegotiating loan terms in distressed conditions. This would result, after controlling for other risk characteristics, in higher default rates for portfolio loans but also higher extension rates. We combine unique loan level supervisory data on banks’ CRE loans held on balance sheet with loan level data from the same banks’ CMBS deals. The results suggest that the differences in loan performance may be due to market segmentation rather than adverse selection. We utilize propensity score matching among individual loans to control for observable heterogeneity and test the robustness of our results.
Forthcoming in RAND Journal of Economics | With Gowrisankaran
We estimate a structural equilibrium model of the market for automatic teller machines (ATMs) in order to evaluate the implications of regulating ATM surcharges on entry, pricing and welfare. We use data on bank characteristics, potential and actual ATM locations and consumer locations; identify the model parameters with a regression discontinuity design (Iowa banned ATM surcharges while neighboring Minnesota did not); and develop methods to estimate the model without computing equilibria. We find that a ban on ATM surcharges reduces ATM entry by 12 percent, increases consumer welfare by 32 percent and lowers producer profits by 34 percent. Total welfare under either regime is 4 percent lower than the surplus maximizing level. The paper can help shed light on the implications of free entry for differentiated products industries.
Evidence and Implications of Regime Shifts: Time-Varying Effects of the United States and Japanese Economies on House Prices in Hawaii
Real Estate Economics 41(3), September 2013, 449-480
We show that local house prices may be driven almost entirely by the demands of one identifiable group for several years and then by demands of another group at other times. We present evidence that house prices in Hawaii were subject to such regime shifts. Prices responded to demands associated with U.S. incomes and wealth for most years from 1975 through 2008. For about a decade starting in the middle of the 1980s, after the Japanese yen appreciated dramatically and Japanese housing and stock market wealth soared, however, house prices in Hawaii responded to Japanese incomes and wealth. Estimated models with these regime shifts outperformed conventional, constant-coefficient models. The regime-shifting model helps explain why, when and by how much the volatility and the elasticities of house prices in Hawaii with respect to the incomes and wealth of the United States and Japan varied over time.
Journal of Financial Services Research, February 2013 | With Laderman
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.
Real Estate Economics 38(2), December 2010, 171-196 | With Spiegel and Yamori
We develop an overlapping generations model of the real estate market in which search frictions and a debt overhang combine to generate price persistence and illiquidity. Illiquidity stems from heterogeneity in agent real estate valuations. The variance of agent valuations determines how quickly prices adjust following a shock to fundamentals. We examine the predictions of the model by studying depreciation in Japanese land values subsequent to the 1990 stock market crash. Commercial land values fell much more quickly than residential land values. As we would posit that the variance of buyer valuations would be greater for residential real estate than for commercial real estate, this model matches the Japanese experience.
Journal of Business and Economic Statistics 28 (4), 2010, 469-482 | With Bajari, Hong, and Nekipelov
We study the estimation of static games of incomplete information with multiple equilibria. A static game is a generalization of a discrete choice model, such as a multinomial logit or probit, which allows the actions of a group of agents to be interdependent. While the estimator we study is quite flexible, we demonstrate that in most cases it can be easily implemented using standard statistical packages such as STATA. We also propose an algorithm for simulating the model which finds all equilibria to the game. As an application of our estimator, we study recommendations for high technology stocks between 1998-2003. We find that strategic motives, typically ignored in the empirical literature, appear to be an important consideration in the recommendations submitted by equity analysts.
International Journal of Central Banking 4(1), March 2008, 125-164 | With Lopez
U.S. bank supervisors conduct comprehensive inspections of bank holding companies and assign them a supervisory rating, known as a BOPEC rating prior to 2005, meant to summarize their overall condition. We develop an empirical model of these BOPEC ratings that combines supervisory and securities market information. Securities market variables, such as stock returns and bond yield spreads, improve the model’s in-sample fit. Debt market variables provide more information on supervisory ratings for banks closer to default, while equity market variables provide useful information on ratings for banks further from default. The out-of-sample accuracy of the model with securities market variables is little different from that of a model based on supervisory variables alone. However, the model with securities market information identifies additional ratings downgrades, which are of particular importance to bank supervisors who are concerned with systemic risk and contagion.
Regional Economic Conditions and Aggregate Bank Performance
In Research in Finance, 24, ed. by A. Chen | Bingley, UK: Emerald Group Publishing, 2008. 103-127 | With Daly and Lopez
The idea that a bank’s overall performance is influenced by the regional economy in which it operates is intuitive and broadly consistent with historical bank performance. Yet, micro-level research on the topic has borne mixed results, failing to find a consistent link between various measures of bank performance and regional economic variables. This chapter attempts to reconcile the intuition with the micro-level data by aggregating bank performance, as measured by nonperforming loans, up to the state level. This level of aggregation reduces the influence of idiosyncratic bank effects sufficiently so as to examine more clearly the influence of state-level economic variables. We show that regional variables, such as employment growth and changes in real estate prices, are not particularly useful for predicting changes in bank performance, but that coincident indicators developed to track a state’s gross output are quite useful. We find that these coincident indicators have a statistically significant and economically important influence on state-level, aggregate bank performance. In addition, the coincident indicators potentially contribute to the out-of-sample forecasts of the relative riskiness of state-level bank portfolios, which should be of interest to bankers and bank supervisors.
House Prices and Consumer Welfare
Journal of Urban Economics 58(3), 2005, 474-487 | With Bajari and Benkard
We develop a new approach to measuring changes in consumer welfare due to changes in the price of owner-occupied housing. In our approach, an agent’s welfare adjustment is defined as the transfer required to keep expected discounted utility constant given a change in current home prices. We demonstrate that, up to a first-order approximation, there is no aggregate change in welfare due to price increases in the existing housing stock. This follows from a simple market clearing condition where capital gains experienced by sellers are exactly offset by welfare losses to buyers. Welfare losses can occur, however, from price increases in new construction and renovations. We show that this result holds (approximately) even in a model that accounts for changes in consumption and investment plans prompted by current price changes. We estimate the welfare cost of house price appreciation to be an average of $127 per household per year over the 1984-1998 period.
Journal of Money, Credit, and Banking 36(6), December 2004, 1043-1067 | With Lopez
We examine whether equity market variables, such as stock returns and
equity-based default probabilities, are useful to U.S. bank supervisors for assessing the condition of domestic bank holding companies. We develop a model of supervisory ratings that combines supervisory and equity market information. We find that the model’s forecasts anticipate supervisory rating changes by up to four quarters. Relative to simply using supervisory variables, the inclusion of equity market variables in the model does not improve forecast accuracy. However, we argue that equity market information should still be useful for forecasting supervisory ratings and should be incorporated into supervisory monitoring models.
Forecasting Supervisory Ratings Using Securities Market Information
In Corporate Governance: Implications for Financial Services Firms. The 39th Annual Conference on Bank Structure and Financial Services Firms | Chicago: FRB Chicago, 2003 | With Lopez
Approximately once a year, bank supervisors in the United States conduct
a comprehensive on-site inspection of a bank holding company and assign
it a supervisory rating meant to summarize its overall condition. We develop an empirical forecasting model of these ratings that combines
accounting and financial market data. We find that securities market variables, such as stock returns and changes in bond yield spreads, improve the model’s in-sample fit. Both equity and debt market variables appear to be useful for explaining upgrades and downgrades. We conclude that stock and bond market investors possess different but complementary information about bank holding company condition. In an out-of-sample forecasting exercise, we find that the forecast accuracy of the model with both equity and debt variables is little different from the accuracy of a model based on accounting and lagged supervisory data alone.
Equilibrium Valuation of Illiquid Assets
Economic Theory 19(2), January 2002, 223-242 | With LeRoy
We develop an equilibrium model of illiquid asset valuation based on search and matching. We propose several measures of illiquidity and show how these measures behave. We also show that the equilibrium amount of search may be less than, equal to, or greater than the amount of search that is socially optimal. Finally, we show that excess returns on illiquid assets are fair games if returns are defined to include the appropriate shadow prices.
A Theory of Liquidity in Residential Real Estate Markets
Journal of Urban Economics 49(1), January 2001, 32-53
A “hot” real estate market is one where prices are rising, average selling times are short, and the volume of transactions is higher than the norm. “Cold” markets have the opposite characteristics–prices are falling, liquidity is poor, and volume is low. This paper provides a theory to match these observed correlations. I show that liquidity can be good while prices are high because the opportunity cost of failing to complete a transaction is high for both buyers and sellers. I also show how state varying liquidity depends on the absence of smoothly functioning rental markets.