The Impact of Collateral Value on Mortgage Originations

Category: Finance Seminar
When: 04 February 2025
, 12:00
 - 13:15
Where: Room Deutsche Bank, HoF E.01

“The Impact of Collateral Value on Mortgage Originations”

Abstract:

This paper establishes that high income-volatility, minority dominant zip codes were disproportionately exposed to the expansion of credit following the BAPCPA 2005 policy change, which granted preferred bankruptcy status to mortgage backed collateral in the sale and repurchase market. This change only affected the collateral value of risky private-label mortgages, not of agency mortgages, and caused the disproportionate expansion of alternative mortgage products among high-income-variability minority-dominant zip codes. These alternative products featured artificially low initial payments that would reset to much higher payments, exposing vulnerable borrowers to synchronized mortgage payment shocks and higher levels of default during the Global Financial Crisis. A model of mortgage lending illustrates that an increase in collateral value decreases lenders’ cost of capital, leading dealers to lower the price they charge to borrowers. If the price falls below the borrowers’ reservation price, lending expands in the affected market, consistent with a demand stimulation mechanism of BAPCPA. This paper provides insights on how to increase stability of private-label mortgages, which substituted for FHA/VA mortgages in the 2000s, if they increase again in volume, as they did in 2019.

Paper (PDF)

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