Michael LaCour-Little's research while affiliated with California State University, Fullerton and other places
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Publications (78)
We examine short term trades in the housing market over the period 2000–2013 using nationally representative data across multiple U.S. housing markets. Such trades, often characterized as “house flipping”, have gained currency in recent years with reality television shows depicting success and failure. We find evidence of returns in excess of marke...
Expanding sustainable homeownership opportunities for lower-income households has long been a housing policy goal. In this paper, we benchmark performance of HomeReady®, a new product targeted at such households, against other low-down payment loan types. Results show that HomeReady® loans have lower relative odds of 90-day delinquency or prepaymen...
Flooding is the most frequent and costliest natural disaster in the United States, yet most households are uninsured or underinsured against flood and may incorrectly expect that government agencies provide sufficient post-flood assistance. This paper synthesizes existing research on flood risks, flood insurance, and their impacts on the U.S. housi...
Mortgage brokers have grown in importance in the home mortgage origination process in recent years, suggesting they provide a valuable service matching borrowers and lenders, although their involvement has also been linked to the recent surge in mortgage defaults and foreclosures. As in other markets dominated by brokers, agents’ incentives are oft...
Given the long term secular decline in interest rates, assumable financing has been of little concern for decades. But given both the growth of loans insured by the Federal Housing Administration (“FHA”) and recent increase in interest rates, this situation is likely to change very soon. Using data from California, we first document the dramatic in...
Given the long term secular decline in interest rates, assumable financing has been of little concern for decades. But given both the growth of loans insured by the Federal Housing Administration ("FHA") and recent increase in interest rates, this situation is likely to change very soon. Using data from California, we first document the dramatic in...
Reverse mortgages are accrual notes of indeterminate maturity secured by home equity. In this paper, we analyze Fannie Mae's experience with the Home Equity Conversion Mortgage, the FHA-insured, non-recourse version of this product. Using loan and borrower characteristics, we model a number of relationships, including loss severity. We also show ho...
Junior lien mortgage debt proliferated during the housing market run up as borrowers used piggyback loans to buy homes or extract home equity. Defaulted second liens now trade in the distressed debt market at large discounts. In this paper, we examine the previously understudied second lien cure rate topic and find that the size and status of the a...
Securitization has been widely assigned blame for contributing to the recent mortgage market meltdown and ensuing financial crisis. In this paper, we employ the Office of the Comptroller of the Currency (OCC) Home Equity database to develop estimates of default and prepayment probabilities for home equity lines of credit (HELOCs) originated during...
We analyze Fannie Mae’s experience with the Home Equity Conversion Mortgage product. From 1993-2010, Fannie Mae acquired 492,465 of these loans, representing 75% of the total market. During this period, prior to recent program changes, credit screening was not an element in the underwriting process. Using loan and borrower characteristics, we model...
Securitization has been widely assigned blame for contributing to the recent mortgage market meltdown and ensuing financial crisis. In this paper, we employ the Office of the Comptroller of the Currency (OCC) Home Equity database to develop estimates of default and prepayment probabilities for home equity lines of credit (HELOCs) originated during...
This paper uses hedonic regression to examine prices in the Christchurch housing market before, and after, the recent severe earthquakes. Prices were relatively stable prior to the earthquakes but increased rapidly thereafter, consistent with the contraction of supply and increased demand from displaced households and a net influx of workers involv...
Home equity lending grew rapidly from 2000 to 2008 with balances more than tripling. In this paper, we examine the role this phenomenon may have played in increasing aggregate default risk during the mortgage crisis. We also document a relationship between growth in home equity lending and high house price depreciation and first mortgage default du...
The recent financial crisis was triggered by large and unexpected losses on mortgages and mortgage-related securities. Here we examine model risk aris-ing from innovations in mortgage markets and the effect on asset values. In particular, we examine the effect of parameter instability in the prepayment function. Using carefully constructed microdat...
The recent financial crisis was triggered by large and unexpected losses on mortgages and mortgage-related securities. Here we examine model risk arising from innovations in mortgage markets and how those innovations affect asset values. In particular, we examine the effect of parameter instability in the prepayment function. Using carefully constr...
Mortgage contract design has been identified as a contributory factor in the recent market crisis. Here we examine alternative mortgage products (including interest-only and other deferred amortization structures) and develop a game theoretic model of contract choice given uncertain future income and house prices across different types of borrowers...
To realize the benefit of the prepayment option embedded in a fixed-rate mortgage (FRM) contract, a borrower would have to make correct refinancing decisions. Hence, a FRM is never “maintenance-free”, such maintenance usually cost a substantial amount of time and effort. This paper asks the question: How do such costs influence borrower’s choice on...
We examine stated income loans originated by Bear Stearns affiliates during the recent housing market run-up and market collapse. After showing the extent to which these loans have higher default rates than do fully documented loans after controlling for other risk factors, we develop a measure for the extent of likely income over-statement. We the...
We examine the use of simultaneous close junior lien lending ("piggybacks") over the course of the recent housing bubble and subsequent mortgage market collapse. Using both state-level and Zip code-level data over the period 2001-2008, we find that the fraction of piggyback originations is related to higher foreclosure and default rates in subseque...
We develop a unique paired loan dataset containing information on multiple conventional conforming mortgage loans of households to examine home equity extraction decisions over the period 2000-2006. The main question addressed is how much households borrow when refinancing their current mortgage debt in a cash-out transaction. We also provide estim...
Mortgage brokers have grown in importance in the home mortgage origination process in recent years suggesting they provide a valuable service matching borrowers and lenders, although their involvement has also been linked to the recent surge in mortgage defaults and foreclosures. As in other markets dominated by brokers, agents' incentives are ofte...
We develop a unique paired loan dataset containing information on multiple conventional conforming mortgage loans to examine home equity extraction decisions over the 2000–2006 period. The main question addressed is how much households borrow when refinancing their current mortgage debt in cash-out transactions and what factors affect that decision...
This paper studies the relationship between housing tenure and mortgage contract. We show that over a limited horizon, borrowers will have incentive to self-select into the appropriate mortgage product such that their fixed-rate period is directly related to their probability of moving. We empirically test the hypothesis based on actual housing ten...
We empirically examine the effect of neighborhood controls, including homeowner associations and private/limited access streets, on house prices using data from St. Louis, one of the first urban areas in which such development patterns emerged. We find that houses located in limited access subdivisions command an economically significant price prem...
The cause of the “housing bubble” associated with the sharp rise and then drop in home prices over the period 1998–2008 has been the focus of significant policy and research attention. The dramatic increase in subprime lending during this period has been broadly blamed for these market dynamics. In this paper we empirically investigate the validity...
This paper presents a review and synthesis of the past fifteen years of research on mortgage termination risk. Understanding termination risk is fundamental to explaining the workings of the now $13 trillion mortgage market. The review covers theoretical, empirical, and methodological work, including both residential and commercial market segments....
The cause of the "housing bubble" associated with the sharp rise and then drop in home prices over the period 1998-2008 has been the focus of significant policy and research attention. The dramatic increase in subprime lending during this period has been broadly blamed for these market dynamics. In this paper we empirically investigate the validity...
Prepayment penalties are ubiquitous in the commercial mortgage market yet reviled and highly restricted by law and regulation in the residential mortgage market. Considering the perspectives of both the borrower and the lender, we attempt a balanced cost-benefit analysis of this controversial contract feature for residential mortgage loans. We will...
Housing policy in the United States has long supported homeownership, yet variation persists across income groups. This article employs recent mortgage origination data to focus on the revealed preferences of low- and moderate-income (LMI) households in home purchase mortgage choice. I identify the factors associated with conventional conforming, F...
We combine loan data from distinct sources to compare and contrast multifamily mortgage lending in Canada and the U.S. After a general comparison of the multifamily housing markets in the two countries, we focus on loan pricing and non-price contract terms in the two environments. We find longer loan terms in the U.S. compared to Canada and attribu...
The release of the 2004?005 Home Mortgage Disclosure Act data raised a number of questions given the increase in the number and percentage of higher-priced home mortgage loans and continued differentials across demographic groups. This paper assesses three possible explanations for the observed increase in 2005 over 2004: (1) changes in lender busi...
We combine loan data from distinct sources to compare and contrast multifamily mortgage lending in Canada and the U.S. After a general comparison of the multifamily housing markets in the two countries, we focus on loan pricing and non-price contract terms in the two environments. We find longer loan terms in the U.S. compared to Canada and attribu...
How long will payments under a residential mortgage loan continue? This question is central to pricing mortgages and mortgage-backed securities, now one of the largest sectors of the bond market. In this chapter, I review the research, identify major themes, and attempt a synthesis: what do we know and what do we not know?
The release of the 2004-2005 Home Mortgage Disclosure Act data raised a number of questions given the increase in the number and percentage of higher-priced home mortgage loans and continued differentials across demographic groups. This paper assesses three possible explanations for the observed increase in 2005 over 2004: (1) changes in lender bus...
The release of the 2004?005 Home Mortgage Disclosure Act data raised a number of questions given the increase in the number and percentage of higher-priced home mortgage loans and continued differentials across demographic groups. This paper assesses three possible explanations for the observed increase in 2005 over 2004: (1) changes in lender busi...
We extend previous research on traditional one-year adjustable-rate mortgages (ARMs) by analyzing the performance of 3/27 hybrid instruments. Under this contract innovation, which first appeared in the mid-1990s, note rates are fixed for three years after which they convert to a traditional one-year adjustment schedule with periodic and lifetime ca...
Call protection in debt contracts is ubiquitous in the bond market, customary in the commercial mortgage market, yet reviled and highly restricted in the residential mortgage market. We examine the reasons for these differences and use Monte Carlo techniques to calculate the economic value of call protection (prepayment penalties) in residential mo...
Banks can choose to keep loans on balance sheet as private debt or transform them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still retain a portion of their loans in portfolio. Do lenders exploit asymmetric...
Empirical research on mortgage default in the single-family market has focused on the value of the borrower's put option using house price indices to estimate contemporaneous loan-to-value ratio or the probability of negative equity. But since the borrower possesses the option to increase leverage by taking on additional debt secured by junior lien...
Banks face the choice of keeping loans on their balance sheet as private debt or transforming them into public debt via asset securitization. Securitization transfers credit and interest rate risk, increases liquidity, augments fee income, and improves capital ratios. Yet many lenders still choose to retain a portion of their loans in portfolio. An...
The magnitude of the effect of government-sponsored enterprise purchases on primary mortgage market rates has been a difficult research question with differing data and competing methodologies producing varying results. Here we present a new approach using loan level data and controlling for credit risk differentials between conforming and nonconfo...
Much of the literature on pricing commercial mortgages and commercial mortgage-backed securities has assumed homogeneity in prepayment penalty structure. In this paper, we provide evidence that such an assumption is inappropriate and examine the effect of penalty structures observed in actual contracts. After conducting preliminary simulations, we...
We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex...
We assess nonparametric kernel density regression as a technique for estimating mortgage loan prepayments - one of the key components in pricing highly volatile mortgage-backed securities and their derivatives. The highly non-linear and so-called "irrational" behavior of the prepayment function lends itself well to an estimator that is free of both...
Using micro-level data from the mortgage market, we examine yield spreads as afunnction of both credit risk and prepayment risk using a two-stage instrumental variableapproach. Our results are consistent with findings in the finance literature that leverageinducedfinancial risk reflected in capital structure results in higher yield spreads on debt.
Developing a good prepayment model is a central task in the valuation of mortgages and mortgage-backed securities but conventional parametric models often have bad out-of-sample predictive ability. A likely explanation is the highly non-linear nature of the prepayment function. Non-parametric techniques are much better at detecting non-linearity an...
We develop estimates of risk-based capital requirements for single-family mortgage loans held in portfolio by financial intermediaries. Our method relies on simulation of default and loss probability distributions via simulation of changes in economic variables with conditional default probabilities calibrated to recent actual mortgage loan perform...
We contribute to the debate over the reform of the Basel Accord by developing risk-based capital requirements for mortgage loans held in portfolio by financial intermediaries. Our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions. Results indicate that appropriate cap...
We model competing risks of mortgage termination where the borrower faces a repeated choice to continue to pay, refinance the loan, move or default. Most previous empirical work on mortgage prepayment has ignored the distinction between prepayments triggered by refinancing and moving, combining them into a single prepayment rate. We show that finan...
This paper shows how reduced form estimates of discrimination in mortgage lending may be biased by race differences in loan demand. The result, which follows formally from the model of the mortgage lending process developed in the seminal paper by Maddala and Trost (1982), has important implications for the regulation of financial institutions. It...
This paper uses microlevel data to examine recent prepayment performance of adjustable rate mortgages (ARMs) employing the competing risk methodology developed by Deng, Quigley and Van Order (2000). We find support for the teaser rate and adjustment date effects implied by the theoretical model of Kau "et al." (1993). In addition, we find that teas...
We model competing risks of mortgage termination where the borrower faces a repeated choice to continue to pay, refinance the loan, move or default. Most previous empirical work on mortgage prepayment has ignored the distinction between prepayments triggered by refinancing and moving, combining them into a single prepayment rate. We show that finan...
Abstract We analyze the problem of disparate impact in credit scoring and eval- uate three approaches to identifying and correcting the problem, namely: 1) post-development univariate test with variable elimination, 2) post- development multivariate test with variable elimination, 3) control vari- able approach with coefficient adjustment. The thir...
This paper empirically examines several open questions regarding prepayment risk in adjustable rate mortgages (ARMs), using loan-level data. Results support the teaser rate and adjustment date effects implied by the theoretical option pricing model of Kau, Keenan, Epperson and Muller (1993). In addition, we find that deeply teased ARMs do have grea...
This paper surveys the effects of technology on mortgage finance over the period 1990-2000, from an industry perspective. Important innovations in the three functional areas of origination, servicing, and portfolio management are identified and their effects discussed. Improvements in information technology, especially in processor speeds, data sto...
Prepayment estimation is essential in forecasting expected mortgage cash flow patterns. Accordingly, mortgage and mortgage-backed security prices are highly dependent on prepayment assumptions. Yet borrower prepayment behavior appears to be highly irrational, in the sense that many borrowers prepay their mortgages when it is not optimal to do so an...
We focus on an agency problem encountered by mortgage lenders and investors in mortgage-backed securities when the underlying collateral is originated by third parties. Third parties, such as mortgage brokers, have economic incentives to encourage borrowers to refinance and, accordingly, their actions may affect asset values. We sketch the principa...
This article surveys the diverse research that examines racial disparities in mortgage lending markets in the context of the fair housing legislation of recent decades. A review of the theoretical models, data, and empirical methods reveals deficiencies in all three areas. A new research agenda focusing on development of more complete models of mor...
Mortgage prepayments are made for many different reasons, and research has been hampered by the inability to distinguish among those reasons for prepayment. In this article, I report results of a loan-level model where full information is available: namely, when the borrower refinances a mortgage with the same lender. With access to detailed loan-l...
This paper surveys the literature on racial disparities in mortgage lending over the past twenty five years, including a discussion of the theoretical models, empirical methods, and data used to test for discrimination. Weaknesses in the models, methods, and data typically used together with results from simulation studies cast serious doubt on man...
We empirically examine the role of appraisal in the residential mortgage lending process--in particular, the incidence, consequences, and determinants of appraisal below contract purchase price. Using the Boston Federal Reserve Study data set, we find that, as expected, low appraised value significantly increases the probability of mortgage loan ap...
The topic of mortgage discrimination has received renewed interest since publication of the Boston Federal Reserve Bank study based on 1990 Home Mortgage Disclosure Act data. That study used traditional direct logistic regression to assess the influence of race on the probability of mortgage loan denial and reported the parameter estimate of race t...
Abstract We examine,stated income,loans originated by Bear Stearns affiliates during the recent housing market,run-up and market,collapse. After showing the extent to which,these loans,have higher default rates than do fully documented loans after controlling for other risk factors, we develop a measure,for the extent of likely income,over-statemen...
The paper examines an agency problem in which borrowers and intermediaries in the housing market inflate appraisals and overstate transaction prices. The purpose of these manipulations is to mislead lenders about the value of the collateral and thus improve borrowers' financing terms. The first part examines whether appraisers distort property valu...
Citations
... We collect data on Fannie Mae and Freddie Mac conforming loan limits for single-unit single family homes across our data sample from 2001 to 2016. 48 Between 2001 and 2007, when the conforming loan limit was constant across our data sample each year, we collect loan limit information from data replication files from LaCour-Little et al. (2022). From 2008 onward, we collect county-by-year loan limit information from the Federal Housing Finance Agency (FHFA). ...
... Meanwhile, housing discrimination among accommodation seekers has been prohibited by local and international bodies across the globe, such as Fair Housing Act, which aimed at prohibits discrimination in the U.S housing sector, the Equal Credit Opportunity Act (ECOA) and Michigan's Elliot-Larsen Civil Rights Act among This work is licensed to the publisher under the Creative Commons Attributions License 4.0 others were introduced to eradicate discrimination in the housing sector (Choi et al. 2019;LaCour-Little 1999). ...
... While the research shows that placing information in the public domain does not guarantee the information will be used for price discovery, the quasi-experimental approach is not well suited for examining the nature of the frictions. More work is needed in this area and we point readers toKousky et al. (2020) for a helpful discussion on possible explanations for the low take up rate of flood insurance that encompasses the relevant information issues. Regardless of the nature of the frictions, the findings support salient disclosure as a simple means of mitigating market distortions, at least during the timeframe examined by the research reviewed here. ...
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... According to the traditional theory, the excessive uncertainty brings a huge risk to the projects. From the perspective of option, the uncertainty will push up the option value [3]. ...
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... We repeat our investigation of mortgage choice distinguishing three subsamples of LTVs: 32 See, for example, Calem and LaCour-Little (2004) and Allen (2004). 33 During most of our sample period, capital requirements in Australia followed the set of Basel I capital accords implemented in 1988; see 'Banking (Prudential Standards) Determination No. 2 of 2005. ...
... Low take-up rates can be driven by budget constraints and charity hazards (Browne & Hoyt, 2000;Grislain-Letrémy, 2018) in which case the latter is a form of moral hazard not to buy insurance in the expectation of a state-provided financial disaster assistance. Other factors that reduce demand for insurance of low-frequency/highseverity events are bounded rationality to assess the impact of these events and distorted incentives for risk mitigation (Kunreuther et al., 2013(Kunreuther et al., , 2019. ...
Reference: Insurability of pandemic risks
... Business processes in the mortgage industry in the United States are comprised of three distinct functional areas: (1) loan origination, (2) secondary marketing, and (3) servicing [6]. The loan origination functional area deals with receiving borrowers' loan applications, qualifying the applications for possible funding, condition resolution, underwriting and loan decisioning, closing document preparation, and funding. ...
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... Lin et al. (2009) explore how the distance to a foreclosed property in space and time impacts home values by focusing on the role of comparables in the price formation process. LaCour-Little et al. (2020) argue that the value of comparables need to be adjusted for loan assumability, particularly in areas with a higher concentration of Federal Housing Administration insured loans. Calomiris et al. (2013) provide evidence that foreclosures dampen house prices, yet the negative impact of prices on foreclosures is much greater, in line with the theory of strategic borrower behavior. ...
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... Rising and volatile prices highlight the importance of the lumpiness of purchase and sale at the beginning and end of the life cycle planning problem. The first paper in this volume (Begley et al., 2020) addresses risk in the reverse mortgage market, a potentially important source of home equity liquidity for seniors. Two papers Myers et al., 2020) characterize first-time buyers. ...
Reference: Special Issue: Life Cycle Consumption
... Other researchers include the costs of selling the property or the net sale proceeds (Park and Bang 2014) to calculate losses. Still others attempt to measure the lost interest payments, and proxies for insurance costs and real estate taxes (Calem and LaCour-Little 2004, Qi and Yang 2009and Cordell, Geng, Goodman, and Yang 2015. This last approach comes closer to estimating the full costs associated with a default. ...
