collateral damage refinancing constraints and regional recessions in the current structure of the u s residential mortgage market a decrease in property values may make it very difficult for homeowners to refinance their mortgages to take advantage of declining interest rates in this papr we show that this form of collateral constraint has greatly reduced refinancing in statds with depressed property markets we outline the interaction between regional recessions and refinancing constraints when adverse economic shocks cause property values in a region to decrease the damage to the collateral makes it difficult or impossible for some homeowners to obtain new mortgages in the recent period this has meant that homeowners in economically depressed regions have been unable to refinance their mortgages to take advantage of declining interest rates this inability to refinance has further economic impacts on the region through lowering the wealth and the discretionary income of local homeowners thereby deepening the regional recession while the possible link between regional declines in property values and refinancing activity has been understood for some time for example monsen 1992 the subject has received very little empirical attention we provide the first quantitative assessment of the impact of constraints arising from regional property market dynamics on refinancing activity to accomplish this we use a new data set on more than thirty five thousand individual mortgages the sample consists of all mortgages serviced by chemical bank with originations between june 1989 and may 1992

prepayment and the valuation of mortgage backed securities this paper puts forward a valuation framework for mortgage backed securities rather than imposing an optimal value minimizing call condition we assume that at each point in time there exists a probability of prepaying this conditional probability depends upon the prevailing state of the economy to implement our valuation procedure we use maximum likelihood techniques to estimate a prepayment function in light of recent aggregate gnma prepayment experience by integrating this empirical prepayment function into our valuation framework we provide a complete model to value mortgagebacked securities given an optimal value minimizing call policy a mortgage should never be called when its market value is less than its call price similarly a mortgage should be called if it is worth more than its call price however mortgagors often call their loans when the prevailing refinancing rate exceeds the contract rate on the loan dunn and mcconnell 1981 in addition some mortgagors do not call their loans when the loan s contract rate exceeds the prevailing refinancing rate the purpose of this paper is to put forward a valuation framework for mortgagebacked securities consistent with these stylized facts associated with mortgage prepayments the mortgagor s prepayment decision is integral to our valuation framework however we do not impose an optimal value minimizing call condition to price these securities rather we assume that at each point in time there exists a probability of prepaying this conditional probability depending upon the prevailing state of the economy by integrating this prepayment function into our valuation framework we provide a complete model to value mortgage backed securities to implement our valuation procedures we estimate a prepayment function given recent gnma prepayment experience we follow green and shoven 1986 by using a proportional hazards model to estimate the influence of various explanatory variables or covariates on the mortgagor s prepayment decision distinct from green and shoven we explicitly model the effects of seasoning as well as investigating the influence of interest cost savings from refinancing in addition we also consider the effects of lagged refinancing rates heterogeneity

sequential testing of duration data the case of the pennsylvania reemployment bonus experiment cost considerations and the need to report the results promptly make it desirable to examine data as it accumulates and to terminate an experimental study as soon as definite statistical conclusions can be drawn these ideas are illustrated in a retrospective analysis of the pennsylvania reemployment bonus experiment recently developed large sample theory for a variety of sequentially computed score processes of time to event duration data with staggered entry enables one to construct stopping boundaries of a prescribed level of significance the gains from the use of sequential methodology appear to be worth while copyright 2000 john wiley sons ltd

authority versus persuasion this paper studies a principal s trade off between using persuasion versus using interpersonal authority to get the agent to do the right thing from the principal s perspective when the principal and agent openly disagree on the right course of action it shows that persuasion and authority are complements at low levels of effectiveness but substitutes at high levels furthermore the principal will rely more on persuasion when agent motivation is more important for the execution of the project when the agent has strong intrinsic or extrinsic incentives and for a wide range of settings when the principal is more confident about the right course of action this abstract was borrowed from another version of this item

the relative termination experience of adjustable to fixed rate mortgages our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable rate and fixed rate mortgages a new set of arm specific interactive determinants expands the conventional frm specification to isolate the unique termination behavior of arms we find that expected rate adjustments and large lifetime caps are positively related to arm termination probabilities while long adjustment frequencies are inversely related caps both periodic and lifetime have a secondary inverse effect on termination probabilities when interest rate movements exceed cap limits the model also shows that interest rate expectations affect frm terminations more strongly than arm terminations in september 1981 commitment rates on fixed rate mortgages frms peaked at 18 after a 3 year 850 basis point rise lenders encumbered with losses from devalued frm portfolios faced insolvency while mortgage applicants constrained by large payment burdens contended with disqualification adjustable rate mortgages arms emerged as a solution to both problems the adjusting note rate allowed lenders to hedge their portfolios against rising interest rates and the discounting of initial arm rates kept household payment ratios within underwriting guidelines the benefit of arms remains questionable however because of the uncertainty surrounding their future payment streams in particular the shift of interest rate risk to borrowers may result in higher default and prepayment risks to lenders uncertainty is further compounded by nonstandard contracts for buydown terms period caps life caps indexes and adjustment periods originators and insurers of arms as well as investors in the emerging market for arm backed securities need arm specific methods for evaluating the cashflow risks of these unique instruments in this paper we address these issues by examining the concurrent default and prepayment experience of arms

consumer ruthlessness and mortgage default during the 2007 to 2009 housing bust from 2007 to 2009 u s house prices plunged and mortgage defaults surged while ostensibly consistent with widespread ruthless default analysis of detailed mortgage and house price data indicates that borrowers do not walk away until they are deeply underwater far deeper than traditional models predict the evidence suggests that lender recourse is not the major driver of this result we argue that emotional and behavioral factors play an important role in decisions to continue paying borrower reluctance to walk away implies that the moral hazard cost of default as a form of social insurance may be lower than suspected this article is protected by copyright all rights reserved

mortgage terminations heterogeneity and the exercise of mortgage options as applied to the behavior of homeowners with mortgages option theoiy predicts that mortgage prepayment or default will be exercised if the call or put option is in the money by some specific amount our analysis tests the extent to which the option approach can explain default and prepayment behavior evaluates the practical importance of modeling both options simultaneouisly and models the unobserved heterogeneity of borrowers in the home mortgage market the paper presents a uinified model of the competing risks of mortgage termination by prepayment and default considering the two hazards as dependent competing risks that are estimated jointly it also accounts for the unobserved heterogeneity among borrowers and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions our results show that the option model in its most straightfolward version does a good job of explaininig default and prepayment but it is not enouigh by itself the simultaneity of the options is very important empirically in explaining behavior the results also show that there exists significant heterogeneity among mortgage borrowers ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners

an analysis of mortgage contracting prepayment penalties and the due on sale clause the due on sale clause contained in most conventional home mortgage contracts is equivalent to a prepayment penalty equal to the difference between the face value and market value of the loan we analyze a bilateral game with asymmetric information and show that the bank demands the full penalty unless the market value of the loan is sufficiently low in that case the bank demands a prepayment penalty which is independent of the market value of the loan in order to induce additional prepayments we also demonstrate by a risk sharing argument that the due on sale clause is optimal in some settings even though it eliminates some beneficial home sales almost all conventional fixed rate home mortgage contracts written in the last decade contain a due on sale clause which gives the lender the contractual right to declare the total indebtedness due immediately if the mortgaged property is transferred as mortgage rates rise lending institutions suffer capital losses on fixed rate mortgage loans while borrowers earn capital gains equal to the difference between the face value and market value of their loans the due onsale clause gives the lending institution the right to demand the borrower s capital gain as a prepayment penalty in order to increase the probability of prepayment it can be optimal for the bank to accept a partial settlement in this paper we analyze the bank s strategy for setting the prepayment penalty it demands under the due on sale clause and examine the optimality of the clause the model we develop also applies to other types of prepayment penalties i e loan covenants which require payment of a premium over market value in order to extinguish

the causal effect of mortgage refinancing on interest rate volatility empirical evidence and theoretical implications this article investigates the effects of mortgage backed security mbs hedging activity on interest rate volatility and proposes a model that takes these effects into account an empirical examination suggests that the inclusion of information about mbss considerably improves model performance in pricing interest rate options and in forecasting future interest rate volatility the empirical results are consistent with the hypothesis that mbs hedging affects the interest rate volatility implied by both options and the actual interest rate volatility the results also indicate that the inclusion of information about the mbs universe may result in models that better describe the price of fixed income securities

optimal mortgage refinancing a closed form solution we derive the first closed form optimal refinancing rule refinance when the current mortgage interest rate falls below the original rate by at least in this formula w is the principal branch of the lambert w function where is the real discount rate is the expected real rate of exogenous mortgage repayment is the standard deviation of the mortgage rate is the ratio of the tax adjusted refinancing cost and the remaining mortgage value and is the marginal tax rate this expression is derived by solving a tractable class of refinancing problems our quantitative results closely match those reported by researchers using numerical methods

the importance of legitimacy within organizations there are typically limits to leaders legitimacy this article explores how organizations are structured in the face of such constraints the concept of legitimacy is formalized in the context of a single agent moral hazard model the principal can give the agent monetary incentives in addition he can give the agent an order the agent finds it costly to disobey orders provided they are legitimate we find that it may be optimal for the principal to take costly actions to bolster legitimacy we argue that many organizational phenomena can be understood as attempts to bolster legitimacy examples include rejection of overqualified workers bureaucracy merger decisions and above market clearing wages

the effects of interest rates on mortgage prepayments three main types of mortgages are fixed interest contracts which automatically fall due on the sale of a dwelling fixed rate loans which are assumable by a buyer and floating rate instruments when interest rates rise the fall in the economic value of these assets in savings and loan associations portfolios varies from one form of mortgage to another for either of the fixed interest rate contracts the cash flow from the mortgage is constant as long as it has not been prepaid if the interest rate rises the homeowner has a nominal capital gain since his loan is then at a below market interest rate he would therefore be less likely to prepay the fall in the savings and loans net worth arises from two factors 1 the interest rate differential for mortgages of a fixed duration and 2 the endogenous lengthening of the duration this paper is an attempt to measure the dependence of the duration of mortgages on the implicit unrealized capital gain of mortgage holders resulting from interest rate changes our estimate is based on a sample of 4 000 mortgages issued in california which were active in 1975 we follow their payment history from 1975 to 1982 using a proportional hazards model we estimate the percentage reduction in prepayment probability associated with interest rate changes our results indicate that for due on sale fixed interest rate mortgages a sudden increase in the interest rate from 10 to 15 percent would induce a 23 percent loss in the economic value of the mortgage if the mortgage were assumable this loss would be 28 percent correspondingly the 6 year average time to repayment of mortgages at a constant interest rate would be lengthened to nine years for due on sale mortgages and 13 1 2 years for assumable ones the definitive version is available at www blackwell synergy com this abstract was borrowed from another version of this item

toward an economic theory of leadership leading by example this paper explores leadership within organizations leadership is distinct from authority because following a leader is a voluntary rather than coerced activity of the followers this paper considers how a leader induces rational agents to follow her in situations when the leader has incentives to mislead them copyright 1998 by american economic association

adverse selection and moral hazard effects in the mortgage market an empirical analysis with imperfect information prices may have sorting and incentive effects that confound the received theory of market behavior these effects are more likely to be observed in situations where transactions extend over a lengthy period of time as in credit and labor markets hence one may observe equilibrium credit rationing or equilibrium unemployment in labor markets even though these markets are competitive and free of government regulation 7 8 in credit markets higher interest rates may adversely sort good credit risks from bad credit risks similarly higher interest rates may induce borrowers to invest in riskier projects and not to exercise due diligence in the minimization of risks moral hazard either the adverse selection or the moral hazard effects can lead to a reduction in expected profits as the interest rate rises the supply of loanable funds is an increasing function of expected profits if expected profits decline over some interval of rising interest rates then the supply of loanable funds will be concave and backward bending with regard to interest rates over that interval stiglitz and weiss identify the interest rate at which the supply function bends backward as the bank optimal interest rate 8 394 the purpose of this paper is to test the empirical implications drawn from the growing adverse selection and moral hazard literature in the home mortgage market a recent citation search reveals that the stiglitz and weiss 8 paper has been cited over one hundred and fifty times in the last nine years in his survey of the literature stiglitz notes that most of this derivative literature is theoretical and that the models have not been the subject of extensive empirical testing 7 42 the paper is organized as follows in section ii we review the adverse selection and moral hazard literature consider the characteristics peculiar to the mortgage market and identify the empirical implications section iii gives our estimates for the empirical model of the mortgage market among other results we find that mortgage supply is a concave function of the rate of

failure to refinance households that fail to refinance their mortgage when interest rates decline can lose out on substantial savings based on a large random sample of outstanding u s mortgages in december of 2010 we estimate that approximately 20 of households for whom refinancing would be optimal and who appeared unconstrained to do so had not taken advantage of the lower rates we estimate the present discounted cost to the median household who fails to refinance to be approximately 11 500

risk based pricing and the enhancement of mortgage credit availability among underserved and higher credit risk populations this paper estimates an option based hazard model of the competing risks of fha mortgage termination results indicate that the elevated default risks of loans originated among lower credit quality and minority borrowers are more than offset by the damped prepayment speeds of those loans so as to result in markedly lower loan termination probabilities among underserved borrower groups those damped termination risks translate into sizable reductions in risk premia to investors in simulated lower creditquality mortgage pools empirical findings suggest that such pooling and risk based pricing of fha insured mortgages could serve to substantially reduce housing finance costs among underserved borrowers so as to advance both their homeownership opportunities and related federal housing policy objectives

optimal dissent in organizations we model an organization as a two agent hierarchy an informed decision maker in charge of selecting projects and a possibly uninformed implementer in charge of their execution both have intrinsic preferences over projects this paper models the costs and benefits of divergence between their preferences that is dissent within the organization dissent is useful to 1 foster the use of objective and sometimes private information in decision making and 2 give credibility to the decision maker s choices however dissent comes at the cost of hurting the implementer s intrinsic motivation thereby impairing organizational efficiency we show that dissent can be optimal in particular when information is useful and uncertainty is high moreover dissent remains an optimal organizational form even when implementers can choose their employer or when decision makers have real authority over hiring decisions

commercial loan borrower s optimal borrowing and prepayment decisions under uncertainty we model a firm which faces continuing stochastic money needs and fluctuating interest rates the borrower minimizes the expected present value of the sum of interest payments and prepayment penalty costs subject to a liquidity constraint since contingent opportunities are absent from the model we find i the firm should not inventory cash ii the firm should prepay the maximum amount possible if it prepays at all

the economic crisis of the 1990s in finland finland s depression a tale of bad luck and bad policies in the 1990s finland underwent a deep depression as its gdp dropped about 14 and unemployment rose from 3 to almost 20 this is a story of bad luck and bad policies bad luck took the form of external shocks the collapse of trade with the former soviet union in 1991 but also sharp cycles in the oecd area however bad luck is far from being the whole story in the absence of bad policies finland would have experienced a recession not a depression bad policies included a poorly designed financial regulation and mistaken reactions to the onset of the crisis of particular interest is the role of financial factors in triggering the crisis and aggravating the effects of bad policies not only were consumption and investment spending hurt by the credit crunch but there is evidence that the private sector s indebtedness has increased structural unemployment which explains why the recovery is proceeding with few job creations a number of general lessons emerge they concern the deregulation of financial markets the policy reaction to massive capital inflows and the role of employment policies seppo honkapohja and erkki koskela

home is where the equity is mortgage refinancing and household consumption applying a permanent income model with exogenous liquidity constraints and mortgage behavior household refinancing when mortgage interest rates are historically high and rising a persistent empirical puzzle is explained using data from the panel study of income dynamics households experiencing an unemployment shock and having limited initial liquid assets to draw upon are shown to have been 25 more likely to refinance 1991 94 on average such liquidity constrained households converted over two thirds of every dollar of equity they removed into current consumption as mortgage rates plummeted 1991 94 producing an estimated expenditure stimulus of at least 28 billion

leadership coordination and corporate culture what is the role of leaders in large organizations we propose a model in which a leader helps to overcome a misalignment of followers incentives that inhibits coordination while adapting the organization to a changing environment good leadership requires vision and special personality traits such as conviction or resoluteness to enhance the credibility of mission statements and to eectively rally agents around them resoluteness allows leaders to overcome

dormancy risk and expected profits of consumer loans abstract a bank that lends money to a household faces two types of risk frequently mentioned is the risk of default seldom referred to is the risk of an early redemption of the loan leading to dormancy in this paper we model the transition of consumer loans from an active to a dormant state to this end we use data on 4786 individuals who were granted credit by a swedish lending institution between september 1993 and august 1995 and estimate a semi parametric duration model we analyze the factors that determine the time to maturity on consumer loans and investigate the ability of the model to match the maturities observed in the data moreover we derive the distribution of conditional expected durations of loans and show how a loan application can be evaluated by calculating its expected profit