Robert Van Order

George Washington University | GW · Department of Finance

The recent surge in property values in China has been similar to the surge in the U.S before the crash in 2007. This raises concerns about whether China is destined to have a crash as well. We estimate similar models of property values for the two countries, in order to compare price dynamics side by side. We find little in common between them. In...

This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2016, defining the “fundamentals” of housing prices with the Gordon dividend discount model, and using lagged rents, prices, real, no...

We analyze causes of the surge in defaults experienced by Fannie Mae and Freddie Mac during the Great Recession. Our data are consistent with the following: The two faced a trade-off between subsidized risk-taking (due to a guarantee implied by their charters) and franchise value (due to the scarcity of their charters). Around 2005 there was a chan...

This paper studies U.S. house prices across 45 metropolitan areas from 1980 to 2012. It applies a version of the Gordon dividend discount model for long-run “fundamentals” and uses mean group and pooled mean group estimation to estimate long-run and short-run determinants of house prices. We find great similarity across cities in that the long-run...

This paper studies the evolution of property values and the connections between shadow banking and property markets in China. We use Pooled Mean Group estimation to analyze Chinese house prices in 65 cities from 2007-2014, defining the " fundamentals " of housing prices with the Gordon dividend discount model, and using lagged rents, prices, real,...

This paper examines the impacts of changes in the Federal Housing Administration (FHA) insured loan limit in response to the Economic Stimulus Act (ESA) of 2008. We examine the number of transactions and average loan-to-value ratios for loans originated in high-cost areas and low-cost areas, before and after the ESA policy change. We find that the...

This paper analyzes endogeneity and identification in models that estimate the effects of instrument choice on performance. Such models occur frequently in analysis of effectiveness of economic policy, happiness and determinants of shareholder value. Based on a direct application of the envelope theorem, we propose an impossibility theorem in estim...

This paper analyzes endogeneity and identification in models that estimate the effects of instrument choice on performance. Such models occur frequently in analysis of effectiveness of economic policy, happiness and determinants of shareholder value. Based on a direct application of the envelope theorem, we propose an impossibility theorem in estim...

This paper models incentives for risk-taking by managers of banks or securitization deals. Of particular interest are risk-retention rules for producers of structured securitization deals, which have been mandated by the Dodd-Frank Act; the model can also be applied to bank managers. We show how incentives can be set up so that problems of asymmetr...

The Federal Housing Administration (FHA) deserves considerable credit for helping support the housing market during the recent financial crisis by increasing its own market share. However, as the recovery continues, the FHA can gradually return to its “traditional” role as an insurer of low-down-payment home mortgages for low-to-moderate-income and...

This article models the riskiness of structured securitization deals. The deals are put together by “banks,” which can exercise strategic options over the risk put into the deals. The banks face a trade-off between the benefits of risk-taking now and future franchise benefits if the deal pays off. The key insight is a convex relationship between th...

The recent financial turmoil has triggered a credit crunch whereby illiquid, but not necessarily insolvent, banks were not able to borrow money and were forced to be liquidated, bought or bailed out. A response to this problem has been contingent convertible bonds (or CoCo bonds), which are ordinary bonds that are converted into equity when certain...

Guarantees are ubiquitous in housing markets, ranging in the United States from Federal Housing Administration (FHA) insurance to institutional guarantees of Fannie Mae and Freddie Mac and banks. It is hard to make a case for guarantees as a device for promoting housing on a stand-alone basis; almost anything that can be done with guarantees can be...

We examine house price co-movements within and cross four major economic blocks: North America, Europe, Oceania and the Far East. The purpose of this study is to establish: (1) Whether there was increased house price correlation within a given economic block or across different blocks in the past 10 years (perhaps as a result of capital market inte...

In this research we exploit the power of a large and rich sample of individual loans originated from 2000 to 2007 to study the relative roles of underwriting, moral hazard and local economic conditions in the Great Surge in mortgage defaults. With these data we can observe the information available to investors and control for observable underwriti...

We explore the role of housing policy in the collapse of Fannie Mae and Freddie Mac, the role of Fannie and Freddie in subprime markets and the sources of their default losses. We do not find evidence that their crash was due much to government housing policy or that they had an essential role in the development of the subprime mortgage-backed secu...

This article analyzes the bubble in property values across cities in the United States from 1999 through 2005. We find evidence of momentum in house price growth (relative to growth in rents) away from the underlying fundamentals throughout the 1980–2005 period; however, momentum increased after 1999. We find that the bubble happened mostly after 2...

Technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending, which is reflected in rising foreclosure rates. We develop a methodology for decomposing the trend in mortgage performance in the national serviced portfolio into a part due to economic conditions and a pa...

This paper analyzes the risk-taking behavior of financial intuitions that have guarantees (e.g., banks with deposit insurance or Government Sponsored Enterprises with implicit guarantees) and/or institutions that find it beneficial to develop a reputation for not taking risk. For instance, banks putting together asset-backed securities have a choic...

This paper analyzes the bubble in property values in the U.S. in the period from 1999 through 2005. We define a bubble as a regime shift characterized by a change in the properties of house price deviations from underlying “fundamentals” that become more self-sustaining and/or more volatile than in other periods. We model the fundamentals of house...

We document that technical progress in originating and pricing mortgages has enabled a trend since 1979 toward more relaxed credit standards on mortgage lending, which is reflected in rising foreclosure rates. We then decompose annual variation in mortgage performance measured by share of loans entering foreclosure into a part due to economic condi...

This paper analyzes the performance of low income and minority mortgages (LIMMs) from a large sample of fixed rate conventional conforming mortgages. We test the extent to which exercise of prepayment and default options differ across groups. In particular, we test the extent to which options embedded in LIMMs are exercised more or less “ruthlessly...

This paper presents a simple version of the application of option based pricing models to mortgage credit risk. The approach is based on the notion that default can be viewed as exercising a put option, and that the place to look in modelling default is the extent to which the option is in the money (the extent to which the borrower has negative eq...

Much of the attention regarding the role of housing and the economy has been concerned with traditional macroeconomic business cycle problems, such as the role of housing as a stabilizer or destabilizer in the macro economy in the “short run.” Here the focus is on the periods beyond that. In particular, housing is a capital good, a part of the capi...

About half of the money that finances housing in the U.S comes from three government-related “Agencies:” two government-sponsored enterprises (GSEs): Fannie Mae and Freddie Mac, and a government owned enterprise, Ginnie Mae, that buy mortgages and securitize them and sell the securities or debt backed by mortgages (or mortgage-backed securities) in...

The paper provides a framework for analyzing the development of securitization as a vehicle for funding loans. Broadly speaking there are two models for funding loans: the portfolio lender model, which typically involves banks or other intermediaries originating and holding the loans and funding them mainly with debt, most often deposits, and the s...

This article analyzes the performance of low-income and minority mortgages (LIMMs) from a large sample of fixed-rate conventional conforming mortgages. We find that low-income borrowers are less likely to prepay when it is optimal, whereas black and Hispanic borrowers prepay more slowly than other borrowers, regardless of the option's value. After...

We examine the history of U.S. mortgage as a means of illustrating the influence of different aspects of the U.S. common law system on financial development. We hypothesize that the value of common law to financial development is with respect to theflexibility that the system provides market participants as they attempt to respond to shocks. This i...

It has been widely assumed that there was a bubble in the U.S. housing market after1999. This paper analyzes the extent to which that was true. We define a bubble as: (1) a regime shift that is characterized by a change in the properties of deviations from the fundamentals of house price growth, and (2) where a shock to the fundamental equation is...

ABSTRACT Equilibrium in spatial models invariably depends on firms' conjectures about how competitors will react to their price changes. This paper analyzes spatial price and location equilibrium when firms hold consistent (i.e. correct) conjectures. Most spatial models assume an exogenous conjecture. Consistent conjectures are one method, albeit a...

This paper presents an asymmetric information model of financial structure. The model has two types of financial institutions: banks and securities markets, both of which can hold loans made to firms to finance investment projects. The securities markets have lower costs, but they have a lemons problem because the banks have better information. The...

The adoption of a single EU currency market raises questions about how individual country mortgage policies are likely to affect the gains that can be realized from this larger market. We use an option pricing model to provide some perspective on this issue. We address questions such as how does the risk exposure of a mortgage guarantee program in...

The purpose of this article is to provide a framework for analyzing the development of securitization as a vehicle for funding community economic development (CED) loans. Broadly speaking, there are two models for funding assets: the portfolio lender model, which typically involves banks or other intermediaries originating and holding the loans and...

US mortgage markets have evolved radically in recent years. An important part of the change has been the rise of the “subprime” market, characterized by loans with high default rates, dominance by specialized subprime lenders rather than full-service lenders, and little coverage by the secondary mortgage market. In this paper, we examine these and...

Real estate data are often characterized by data irregularities: missing data, censoring or truncation, measurement error, etc. Practitioners often discard missing- or censored-data cases and ignore measurement error. We argue here that an attractive remedy for these irregularity problems is simulation-based model fitting using the Gibbs sampler. T...

This paper models the structure of a financial market that is composed of two types of institutions, banks and securities or secondary markets. The model analyzes the development of the securities market as a way of trading off its lower cost of securitization with adverse selection due to asymmetric information possessed by banks, using a simple a...

The most important public-policy issues raised by government-sponsored enterprises (GSEs), such as Fannie Mae and Freddie Mac (F&F), revolve around their charters and the perception of government support that goes those charters. The perception of government support gives GSEs "embedded options" (conjectured guarantees and conjectures about conject...

This paper investigates differences in default losses across income groups and neighborhoods, in an effort to see if there are significant differences between default experience on loans to low-income households or low-income neighborhoods and other loans. We find that while defaults and losses are somewhat higher in low-income neighborhoods, defau...

Option theory predicts that mortgage prepayment or default will be exercised by homeowners if the call or put option is sufficiently "in the money." This analysis: tests the extent to which the option approach explains default and prepayment behavior; evaluates the importance of modeling both options simultaneously; and models the unobserved hetero...

Understanding mortgage markets requires understanding the changing roles of and the competition between the primary and secondary markets. A description of the competitive structure of the mortgage market can be summarized as one of dueling charters. Of the two major charters in the industry, one is for depositories (banks and thrifts), which have...

This paper presents a unified model of the default and prepayment behavior of homeowners in a proportional hazard framework. The model uses the option-based approach to analyze default and prepayment and considers these two interdependent hazards as competing risks. The results indicate the sensitivity of default to the initial loan-to-value ratio...

This paper provides explicit and powerful tests of contingent claims approaches to modeling mortgage default. We investigate a model of “frictionless” default (i.e., one in which transactions costs, reputation costs, and moving costs play no role) and analyze its implications-the relationship between equity and default, the timing of default, its d...

This paper tests the contingent claims model of mortgage default in its ruthless or frictionless form. The principal tests of the model are based on an unconventional source of data, namely, loan loss severities on defaulted mortgages. The frictionless model has well-defined predictions about loss severities which we test in detail. The data analyz...

This paper analyzes credit risk for residential mortgages. Estimates of the hazard of mortgage default are presented, based upon a large sample of conventional loans issued in the late 1970s. Mean returns are estimated, together with variances and covariances for various loan-to-value (LTV) ratios and geographic groups. These results are then used...

We test some of the qualitative properties of mortgage pricing models. The models use option pricing techniques, focusing on prepayment as a call option. They imply a quite nonlinear relationship between mortgage price and coupon, interest rates and volatility. We test for both the first and second derivatives of the effects of these variables usin...

This paper uses mortgage history data from the Federal Home Loan Mortgage Corporation to analyze the prepayment behavior of homeowners and to test whether borrowers exercise their prepayment options in a manner consistent with contingent claims models. A variety of hazard models are estimated from individual data on more than 6000 mortgages issued...

The securitization of fixed-rate mortgages suggests that the FHA/VA market was fully integrated with capital markets by the early 1980s and that the conventional market moved toward integration during the 1980s. Assuming full integration of FHA/VAs via the GNMA securitization process, we first estimate equations explaining near-par GNMA prices week...

The paper analyzes the guarantee of the Federal National Mortgage Association (FNMA). Rather than try to price the guarantee, we used time-series estimates of its value from Kane and Foster to infer the behavior of FNMA in exploiting the guarantee. The results are consistent with a model that predicts that FNMA does not take as much risk as it migh...

Mortgages, like all debt securities, can be viewed as risk-free assets plus or minus contingent claims that can be usefully viewed as options. The most important options are: prepayment, which is a call option giving the borrower the right to buy back the mortgage at par, and default, which is a put option giving the borrower the right to sell the...

Imperfect competition has been an important branch of economic theory, at least since Cournot’s (1838) model of duopoly. A more recent development is spatial competition, which serves as a foundation for models of imperfect competition. The concept of space as the groundwork for imperfect competition provides many useful insights into price determi...

Recent models of pricing mortgages and/or mortgage insurance have used option-pricing models as their framework. The focus is usually on default, which is viewed as a put option (to sell the house to the lender in exchange for the mortgage) and prepayment, which is viewed as a call option (to buy the mortgage from the lender). Analysis then uses te...

This paper identifies and tries to clarify the effects of a number of changes in the system of delivering mortgage credit and housing subsidies. First, we examine the trends in housing and mortgage market data and policy. This review highlights the perceived relationships of these sectors to the rest of the economy. We then focus on and develop the...

Addresses a controversy initiated by Demsetz concerning the consistency of the assumptions underlying monopolistic competition. Placing the issues in spatial context confirms Demsetz' argument that free entry does not necessarily imply zero profit but refutes the argument that free entry leads to perfect competition.-from Authors

This paper provides a survey on studies that analyze the macroeconomic effects of intellectual property rights (IPR). The first part of this paper introduces different patent policy instruments and reviews their effects on R&D and economic growth. This part also discusses the distortionary effects and distributional consequences of IPR protection a...

Research on the spatial firm has shown that spatial results often differ from non-spatial. This paper considers the relationship between the price of a spatial monopoly and the price of a spatially competitive firm. The conditions under which the competitive price will exceed the monopoly price are outlined.