Market Structure, Credit Expansion and Mortgage Default Risk

Transcription

1 Market Structure, Credit Expansion and Mortgage Default Risk By Liu, Shilling, and Sing Discussion by David Ling

2 Primary Research Questions 1. Is concentration in the banking industry within a state associated with: securitized non-agency mortgage originations at ZIP code level? the risk of (loan level) mortgage default? 2. Is contestability (competition) in the banking industry within a state associated with: securitized non-agency mortgage originations at ZIP code level? the risk of (loan level) mortgage default?

3 How are Concentration & Contestability Concentration Gini coefficients: Measured? A coefficient of zero means equality (no concentration within state) A coefficient of one indicates a high level of concentration Contestability H-statistic (Rosse and Panzar, 1977) In a high H-statistic state, banks operate more efficiently (produce the same level of services at a lower marginal cost) In a low H-statistic state, banks operate more inefficiently (produce services at a higher marginal cost)

4 Data Mortgage level data from 6,000 non-agency residential MBSs i.e., securitized private label subprime & jumbo loans Time period of analysis: January 1999 to June of 2009 Unit of observation: ZIP code in mortgage supply regressions Individual mortgage in default regressions Annual frequency 234,079 zip code-year observations in supply regressions More than 4 million mortgages in default regressions Pooled time series cross sectional data set/empirics

5 Results Increased concentration in banking markets (within a state) increases originations at the ZIP code level Increased contestability reduces originations at the ZIP code level Significant variations among banks operating in different market structures High concentration & contestability increase default risk Results support the concentration-fragility view i.e., creating large & less competitive banks is dangerous

6 Big Picture: What Explains the Flow of Residential Mortgages? Responses I would probably get from a president at one of the local banks in Gainesville. Interest rates Recent house price appreciation Creates liquidity/transactions/mortgage applications Especially important for cash-out refinancings Mortgage product innovations Especially in the subprime market (option ARMs) Underwriting innovations

7 Big Picture: What Explains the Flow of Residential Mortgages? Bank president would probably not list the concentration or competitiveness of the Florida banking industry as a factor Probably very important in less developed countries with credit constraints But in highly developed economies, bank concentration & competitiveness may be of 2 nd order importance Especially given the existence of Fannie, Freddie, FHA, and other mortgage lenders

8 Problems with Measuring Bank Concentration & Competitiveness at State Level? Many mortgages sourced by brokers who work for banks in different states What happened if I obtained a Wachovia mortgage in Florida in 2004s? Origination/flow shows up in my Gainesville ZIP code But loan affects authors concentration calculation in North Carolina In fact, isn t NC a big problem?

9 Dependent Variable in Mortgage Supply Equation Not total originations but non-agency originations that are securitized What about the shadow/fringe supply of mortgage credit? Savings associations/credit unions Brokers who source loans for national loan originators On-line mortgage companies Is really an analysis of subprime & jumbo securitization and those two should probably be separated

10 Dependent Variable in Mortgage Supply Equation Divide mortgage flows by # of HHs or by # of HHs in prime owning years Seniors zip codes versus zip codes loaded with young families with children Seniors use less mortgage debt & use less subprime when they do borrow

11 Other Comments Interest rates Recent house price appreciation Mortgage product innovations Underwriting innovations Year fixed effects control for some of these factors but are blunt instruments

12 Other Comments Interest rates Recent house price appreciation Mortgage product innovations Underwriting innovations Year fixed effects do not capture variation in house price appreciation across state & local markets Add (lagged) MSA-level (FHFA) appreciation rates to isolate effects At a minimum add MSA-level (or zip code) fixed effects

13 Mortgage Default Equations Dependent variable: Loan performance is right censored at June of 2009 Is significant left-censoring of foreclosure a concern? Month-by-month performance data are only available for July 2007 to June of 2009 For mortgages terminated prior to July 2007, July 1, 2007 is used as termination date These dead mortgages are treated as cases with delayed foreclosure which likely biases downward the probability of default

14 Mortgage Default Equations Independent variables: Probability of negative equity & individual FICO scores control for some MSA-level unobservables But need other demographic variables to control for zip code/msa unobservables

15 Other Comments What banks are included in measures of concentration & contestability? Wharton s banking database? How correlated are concentration & contestability? Authors find that more concentration increases originations in zip code But increased concentration probably means fewer portfolio loans (large banks even more likely to originate & sell than small & medium size banks) which means a larger supply of securitized loans but not total loans

16 Other Comments Why include LAMT zip /LAMT city in supply equation? How can the coefficient on concentration in the supply equation be positive, but the coefficients on the 1 st and 10 th deciles be negative? Page 17: I just don t believe that credit expansion reduces default hazards (in contrast to Mian and Sufi, 2009)

17 Market Structure, Credit Expansion and Mortgage Default Risk By Bo, Shilling, and Sing Discussion by David C. Ling

18 What is Contestability? A contestable market is one in which there are low barriers to entry Limited brand loyalty Low profits due to the ability of hit & run firms to enter the market

19 Dependent variable: Credit Supply Equations aggregate (number or dollar?) amount of securitized, non-agency mortgages originated each year at the ZIP code level Explanatory variables: Vector of state-level banking structure variables (C it ) Concentration Contestability Vector of zip code & city-level controls (Z it ) Year fixed effects (Y t )

20 Mortgage Default Equations Dependent variable: Instantaneous default hazard of individual mortgage k Explanatory variables: Baseline hazard related to age of mortgage Vector of state-level banking structure variables (C it ) Concentration Contestability Mortgage & borrower characteristics LTVs FICO scores ARM vs. fixed rate

21 Mortgage Default Equations Explanatory variables, continued: Option & housing price variables Probability of negative equity Prepayment option Relative housing value Year fixed effects (Y t ) Predicted mortgage supply, F (i.e., two-stage least squares) Estimated with Cox s partial maximum likelihood method

22 Big Picture: What Explains the Flow of Residential Mortgages? Not going to concentrate on theory & literature review sections Quite a lot going on Unfamiliar with much of the theory Instead, will focus on data & empirical approach including whether the data are up to the task of testing their stated hypotheses