Money supply
Financial Literacy, Broker–Borrower Interaction and Mortgage Default
James Conklin
Real Estate Economics, forthcoming
Abstract:
This article examines the relationship between broker–borrower interaction in the origination process and subsequent mortgage performance. I show that face-to-face interaction between a mortgage broker and borrower before the loan funds is associated with lower levels of ex post default. The relation between face-to-face broker–borrower interaction and mortgage performance holds only for borrowers that have characteristics associated with low levels of financial literacy. Specifically, face-to-face interaction is negatively related to default for minorities, borrowers located in areas with low levels of education, low-income borrowers and borrowers with low FICO scores. My results suggest that face-to-face interaction between the mortgage broker and borrower may reduce problems associated with financial illiteracy.
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Discrimination in Mortgage Lending: Evidence from a Correspondence Experiment
Andrew Hanson et al.
Journal of Urban Economics, March 2016, Pages 48–65
Abstract:
We design and implement an experimental test for differential response by Mortgage Loan Originators (MLOs) to requests for information about loans. Our e-mail correspondence experiment is designed to analyze differential treatment by client race and credit score. Our results show net discrimination by 1.8 percent of MLOs through non-response. We also find that MLOs offer more details about loans and are more likely to send follow up correspondence to whites. The effect of being African American on MLO response is equivalent to the effect of having a credit score that is 71 points lower.
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Crises and the Development of Economic Institutions: Some Microeconomic Evidence
Raghuram Rajan & Rodney Ramcharan
American Economic Review, forthcoming
Abstract:
This paper studies the long run effects of financial crises using new bank and town level data from around the Great Depression. We find evidence that banking markets became much more concentrated in areas that experienced a greater initial collapse in the local banking system. There is also evidence that financial regulation after the Great Depression, and in particular limits on bank branching, may have helped to render the effects of the initial collapse persistent. All of this suggests a reason why post-crisis financial regulation, while potentially reducing financial instability, might also have longer run real consequences.
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Borrower protection and the supply of credit: Evidence from foreclosure laws
Jihad Dagher & Yangfan Sun
Journal of Financial Economics, forthcoming
Abstract:
Laws governing the foreclosure process can have direct consequences for the costs of foreclosure and, therefore could affect lending decisions. We exploit the heterogeneity in judicial requirements across US states to examine their impact on banks’ lending decisions in a sample of urban areas straddling state borders. A key feature of our study is the way it exploits an exogenous cutoff in loan eligibility to government-sponsored enterprises (GSEs) guarantees, which shift the burden of foreclosure costs onto the GSEs. We find that judicial requirements reduce the supply of credit only for jumbo loans, which are ineligible for GSE guarantees, i.e., in the nonsubsidized segment of the market. Thus, while we find a significant effect on credit supply, the aggregate impact is muted by the indirect cross-subsidy by the GSEs to borrower-friendly states.
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Racial Differences in Mortgage Denials Over the Housing Cycle: Evidence from U.S. Metropolitan Areas
Christopher Wheeler & Luke Olson
Journal of Housing Economics, December 2015, Pages 33–49
Abstract:
The cyclical movement of housing prices likely affects the supply of and demand for credit for home purchases, but little is known about how this process might influence differential access to credit between minority and non-minority borrowers. This paper uses data reported through the Home Mortgage Disclosure Act (HMDA) over the period 1990-2013 to estimate the relationship between annual metropolitan area-level house price inflation and the extent to which Black borrowers are denied relative to ‘comparable’ White borrowers on their loan applications. The results indicate that, on average, Black borrowers are denied more frequently than White borrowers, but this difference in denial rates decreases significantly as house prices rise more rapidly. Such results demonstrate the importance of considering local housing market conditions when using HMDA data to assess lender compliance with fair lending laws.
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Where Are All the New Banks? The Role of Regulatory Burden in New Bank Formation
Robert Adams & Jacob Gramlich
Review of Industrial Organization, March 2016, Pages 181-208
Abstract:
New bank formation in the U.S. has declined dramatically since the financial crisis, from over 130 new banks per year to less than 1. Many have suggested that this is due to newly-instituted regulation, but the current weak economy and low interest rates (which both depress banking profits) could also have played a role. We estimate a model of bank entry decisions on data from 1976 to 2013 which indicates that at least 75 % of the decline in new bank formation would have occurred without any regulatory change. The standalone effect of regulation is more difficult to quantify.
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Ripples of Fear: The Diffusion of a Bank Panic
Henrich Greve, Ji-Yub (Jay) Kim & Daphne
The American Sociological Review, forthcoming
Abstract:
Community reactions against organizations can be driven by negative information spread through a diffusion process that is distinct from the diffusion of organizational practices. Bank panics offer a classic example of selective diffusion of negative information. Bank panics involve widespread bank runs, although a low proportion of banks experience a run. We develop theory on how organizational similarity, community similarity, and network proximity create selective diffusion paths for resistance against organizations. Using data from the largest customer-driven bank panic in the United States, we find significant effects of organizational and community similarity on the diffusion of bank runs. Runs on banks are more likely to diffuse across communities with similar ethnicities, national origins, religion, and wealth, and across banks that are structurally equivalent or have the same organizational form. We also find stronger influence from runs that are spatially proximate and in the same state.
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ATM Fees at Black and Hispanic Owned Single Market Banks: A Comparative Analysis
Russ Kashian, Richard McGregory & Robert Drago
Review of Black Political Economy, March 2016, Pages 69-84
Abstract:
This paper presents evidence regarding three types of ATM fees: foreign fees charged for use of a non-bank ATM by the bank’s customers, surcharges for use of bank ATMs by non-customers, and balance inquiry charges for the bank’s own customers. It is hypothesized that, among single market banks, fees will be positively correlated with bank size, a lack of market competition, market penetration by multimarket banks, banks serving low income communities, and Black owned banks (BOBs) and Hispanic owned banks (HOBs), although banks may try to confuse depositors with fees that exhibit a low correlation, or may set low surcharges as part of a loss leader strategy. A 2013 sample of approximately 1500 single market banks, including 21 Black owned banks (BOBs) and 19 Hispanic owned banks (HOBs) is used for correlation and regression analyses. It is found that BOBs charge an average of $0.50 higher foreign fees, and are more likely to charge balance inquiry fees. We also find that larger banks tend to charge higher fees, and that banks may set higher fees where they serve disadvantaged communities of color. Surprisingly, market competition is never significantly associated with ATM fees, and there is minimal correlation across fees, and both results are consistent with banks setting fees strategically to confuse customers.
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Decision-Making During the Credit Crisis: Did the Treasury Let Commercial Banks Fail?
Ettore Croci, Gerard Hertig & Eric Nowak
Journal of Empirical Finance, forthcoming
Abstract:
Limited attention has been paid to the comparative fate of banks benefiting from Capital Purchase Program (CPP) funding and less fortunate banks subject to FDIC resolution. We address this omission by investigating two core issues. One is whether commercial banks that ended up being subject to FDIC resolution received CPP funds. The other is whether the non-allocation of CPP funds made FDIC receivership more likely for viable commercial banks. Our findings show almost no overlap between CPP-funded and FDIC-resolved commercial banks, but we provide evidence that a significant number of FDIC-resolved banks could have avoided receivership if they had been allocated CPP funding. By comparing estimated funding and resolution costs we also show that bailing out more banks would have been cost-efficient. While our results do not allow for any policy suggestion on the optimality of bail-outs per se, they suggest that once a bail-out program is already on the table, it is better to err on the side of rescuing too many rather than too few banks.
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Assessment Inequity in a Declining Housing Market: The Case of Detroit
Timothy Hodge et al.
Real Estate Economics, forthcoming
Abstract:
We examine the degree to which assessment practices in the City of Detroit have created substantial inequities in property tax payments across residential properties. Two key contributions of this article include: (1) inequities created by assessment practices are examined in a collapsed real estate market, and (2) quantile regression techniques are used to determine how assessment practices have altered assessment distributions within and across property value groups. Results show that current practices have created a wide range of property tax payments across properties with similar value (horizontal inequity), and similar tax payments for properties of differing values (vertical inequity).
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Owner Occupancy Fraud and Mortgage Performance
Ronel Elul & Sebastian Tilson
Federal Reserve Working Paper, December 2015
Abstract:
We use a matched credit bureau and mortgage data set to identify occupancy fraud in residential mortgage originations, that is, borrowers who misrepresented their occupancy status as owner occupants rather than residential real estate investors. In contrast to previous studies, our data set allows us to show that such fraud was broad based, appearing in the government-sponsored enterprise market and in loans held on bank portfolios as well. Mortgage borrowers who misrepresented their occupancy status performed worse than otherwise similar owner occupants and declared investors, defaulting at nearly twice the rate. In addition, these defaults are significantly more likely to be 'strategic' in the sense that their bank card performance is better and utilization is lower.
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Do Federal Reserve Bank presidents’ interest rate votes in the FOMC follow an electoral cycle?
Stefan Eichler & Tom Lähner
Applied Economics Letters, forthcoming
Abstract:
We find that Federal Reserve Bank presidents’ regional bias in their dissenting interest rate votes in the Federal Open Market Committee follows an electoral cycle. Presidents put more weight on their district’s economic environment during the year prior to their (re-)election relative to nonelection years.
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Bank overdraft pricing and myopic consumers
Marlon Williams
Economics Letters, February 2016, Pages 84–87
Abstract:
In recent years, banks have routinely earned annual percentage rates of over 1,000 percent on overdraft services. Such returns are staggeringly high, especially in an arguably competitive industry; and consequently, consumer protection groups have been lobbying for increased oversight of bank overdraft fees (and similar fees). In the context of a model proposed by Gabaix and Laibson 2006, I find support for the argument that banks target myopic consumers – consumers who do not consider the add-on good when choosing the base product. Using demographic characteristics to proxy for the proportion of myopic consumers, I find results that are consistent with Gabaix and Laibson 2006 in the pricing of bank overdraft services.
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Timing Is Money: Does Lump-Sum Payment of Tax Credits Induce High-Cost Borrowing?
Lauren Eden Jones & Katherine Michelmore
University of Michigan Working Paper, January 2016
Abstract:
One important feature of the Earned Income Tax Credit (EITC) is that many families receive a large lump-sum payment when they file their taxes each year. In this paper, we use the Survey of Income and Program Participation (SIPP) wealth topical modules from 1990 to 2008 to analyze the impact of the expansions of the EITC at the federal and state level over the last twenty years on household savings and unsecured debt. Results suggest that increases in tax credit generosity are associated with increases in both household savings and debt. Using the Consumer Finance Monthly survey (CFM), we then show a seasonal pattern of debt accumulation for low-income households that reflects the once-a-year timing of benefits structure: low-income households are much more likely to pay down their debt in the months surrounding tax filing compared to their higher-income counterparts, while there is little or no difference in their debt accumulation and payoff compared to higher-income families throughout the rest of the year. We estimate that the use of high-cost credit to finance consumption during non-EITC months results in approximately 8 percent of all EITC funds being paid in consumer interest payments.
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What's in an education? Implications of CEO education for bank performance
Timothy King, Abhishek Srivastav & Jonathan Williams
Journal of Corporate Finance, forthcoming
Abstract:
Exploiting a unique hand-built dataset, this paper finds that CEO educational attainment, both level and quality, matters for bank performance. We offer robust evidence that banks led by CEOs with MBAs outperform their peers. Such CEOs improve performance when compensation structures are geared towards greater risk-taking incentives, and when banks follow riskier or more innovative business models. Our findings suggest that management education delivers skills enabling CEOs to manage increasingly larger and complex banking firms and achieve successful performance outcomes.