Essays in Mortgage Finance and Securitization

The Great Recession renewed focus on various stages of a mortgage's life---how they are originated, why borrowers default on them, and how default is ultimately resolved. More specifically, the chapters of this dissertation shed light on the factors determining the success of mortgage renegotiation, and on the rise in the origination of complex mortgage instruments. Features of the securitized mortgage market are either explicitly studied, or provide the foundation for the empirical methodologies I develop./nDuring the housing crisis regulators faced impediments in their unprecedented intervention to promote large-scale mortgage renegotiation. What hampered renegotiation in the wake of the crisis? To answer this question, in Chapter 1, The Limited Benefits of Mortgage Renegotiation, I study the expected gains from renegotiation for both sides of a mortgage contract: investors and borrowers. To overcome selection bias, I use plausibly exogenous variation in the propensity of intermediaries to renegotiate mortgages. I find that loan modification helped investors recover 3.5% more of the principal balance outstanding at the time of delinquency relative to foreclosing upon the borrower. However, there was substantial variation around this mean---a 12.5% (3.6 times the mean) standard deviation---which highlights the high degree of uncertainty about the realization of these gains. Thus, despite expected gains to borrowers---higher credit scores and a $115 increase in monthly consumption---regulators' attempts to promote mortgage renegotiation have proven to be ineffective, exacerbating debt overhang and its consequences./nThe setting of Residential Mortgage Backed Securitization (RMBS) provides an ideal testing ground for theories of debt-structure, agency problems and their effect on debt renegotiation. Via the tranching of cash flows from underlying mortgages, an RMBS transaction creates multiple securities with claims to the underlying collateral. Moreover, tax law mandates the hiring of an agent, the Servicer, to manage the underlying collateral. In Chapter 2, Multiple Tranches, Information Asymettry and the Impediments to Mortgage Renegotiation, I first develop a simple conceptual framework to outline the channels via which multiple claim-holders induce fewer than optimal loan modification by worsening the agency problem between mortgage Servicers and RMBS Sponsors. Then, using within deal variation in the number and structure of tranches, I find that loans in pools collateralizing fewer tranches are more likely to be modified conditional upon being seriously delinquent. I also find that modified loans in such loan pools were likely to receive more aggressive loan modifications. The results provide evidence for one channel via which the securitization of mortgages inhibited the renegotiation of delinquent mortgages in the wake of the housing crisis, and complement the results of Chapter 1./nIn Chapter 3, Partial Deregulation and Competition: Evidence from Risky Mortgage Origination, co-authored with Amir Kermani (University of California, Berkeley) and Marco Di Maggio (Harvard University), we exploit the OCC's preemption of national banks from state laws against predatory lending as a quasi-experiment to study the effect of deregulation and its interaction with competition on the supply of complex mortgages. Following the preemption ruling, national banks significantly increased their origination of loans with prepayment penalties by comparison with national banks in states without predatory-lending laws. We highlight a competition channel: in counties where OCC-regulated lenders had larger market shares, non-OCC lenders responded by increasing their use of riskier contract features, such as deferred amortization, adjustable rates and interest-only payments, which were not restricted by the state predatory-lending laws.

Advisor: Wallace, Nancy