Essays in Mortgage Funding and Risk Management

This dissertation consists of three chapters on mortgage funding and risk management./nThe U.S mortgage market is very concentrated. In 2006, the top 40 lenders were responsible/nfor the origination of 96 percent of all mortgages (Stanton et al. (2014)). These large lenders/noriginated about 60 percent of the mortgages through the wholesale channel, delegating parts/nof the origination process to third party agents such as mortgage brokers and correspondent/nlenders. I show that the type of agent selected by the wholesale lender could crowd out/nlocal banks, who often act as correspondents and rely on these wholesale lenders for funding./nI also show that this crowding out has spillover eects. As local banks decreased their/npresence in the county, they have also reduced other types of lending. As a result, their local/ncommunities showed less growth in small businesses./nThe second chapter discusses the perils of warehouse lending. Warehouse lending is an/nimportant part of the U.S. mortgage market because a large fraction of mortgage origination,/nboth pre-crisis and currently, is carried out by non-depositories who are reliant on warehouse/nfacilities to fund their mortgage origination activity. After the passage of The Bankruptcy/nAbuse Prevention Act (BAPCPA), in April 2005, most warehouse facilities were structured/nas Master Repurchase Agreements (MRAs). BAPCPA re-dened the mortgage loans held/nas collateral on the warehouse lines (the newly originated mortgages) as repo thus exempting/nthem from automatic stay upon the bankruptcy of the mortgage originator (the repo/nseller). We consider the eect of the growth of MRAs for funding mortgage originations on/nthe performance of the mortgage originators (repo sellers) and warehouse lenders (repo buyers)./nWe nd that mortgage originators (repo sellers), that used MRAs to fund their loans,/noriginated mortgages of lower quality and that these originators were more likely to declare/nbankruptcy. Symmetrically, we nd that the warehouse lenders (repo buyers) experienced a/nsharper increase in mortgage charge-os and non-performing mortgages than non-warehouse/nlenders, even though the quality of the retail and wholesale mortgages that they originated/nwere comparable to the quality of mortgages originated by non warehouse lenders. This/nnegative outcome for warehouse lenders arose from the exemption of the mortgage repo/ncollateral from automatic stay, since under BAPCPA the poor quality assets of bankrupt counter parties, the mortgage originators, became consolidated on the warehouse lender balance/nsheets. Thus, the consolidated loans from the bankrupt counter parties generated an/nimportant component of the deterioration in the warehouse lenders' mortgage/nIn the third chapter, we propose an empirical duration measure for the stock of U.S./nAgency MBS that appears to be less prone to model risk than measures such as the Barclays/nEective Duration measure. We nd that this measure does not appear to have a strong/neect on the 12-month excess returns of ten-year Treasuries as would be expected if shocks/nto MBS duration lead to commensurate shocks to the quantity of interest rate risk borne/nby professional bond investors (see, Hanson, 2014; Malkhozov et al., 2016). Given this/nnegative reduced form result, we then explore the mortgage and treasury hedging activities/nof the primary MBS investors such as commercial banks, insurance companies, the agencies,/nthe Federal Reserve Bank, Mutual Funds, and foreign investors. We nd that the only/ninvestors that may follow the models of Hanson (2014) and Malkhozov et al. (2016) are/nforeign investors in Switzerland and the United Kingdom and life insurance rms. Life/ninsurance rm market share has declined over the period, dropping below 10% since 1996/nand reaching 4% in 2016. Furthermore, Switzerland and the United Kingdom are not major/nparticipants in the US Treasury market. Of the investors we are not able to study, hedge/nfunds and pensions/retirement funds are the two investor groups that may trade along the/nHanson (2014) and Malkhozov et al. (2016) models. However, although these two investor/ngroups held almost 25% of the Agency MBS market (including households and non prot/norganizations) in the late 1990s, post crisis their share has fallen below 10%

Advisor: Wallace, Nancy