Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default

Melzer, Brian T.

doi:10.1111/jofi.12482

Cited by 134 publications

(61 citation statements)

References 63 publications

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“…Although the notion that debt affects firms’ investment decisions has been prominently featured in the finance literature, the evidence we report is inconsistent with traditional distortions such as asset substitution (see, e.g., Gilje (2016) for an overview) or debt‐overhang‐related underinvestment (see, e.g., Melzer (2017) for an overview). Our results point to a previously unrecognized debt‐related distortion as the documented deadweight loss stems from acceleration (not delay ) of investments.…”

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confidence: 81%

Drilling and Debt

Gilje¹,

Loutskina²,

Murphy

2020

The Journal of Finance

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This paper documents a previously unrecognized debt-related investment distortion. Using detailed project-level data for 69 firms in the oil and gas industry, we find that highly levered firms pull forward investment, completing projects early at the expense of long-run project returns and project value. This behavior is particularly pronounced prior to debt renegotiations. We test several channels that could explain this behavior and find evidence consistent with equity holders sacrificing long-run project returns to enhance collateral values and, by extension, mitigate lending frictions at debt renegotiations. * Erik P. Gilje is with the Wharton School, University of Pennsylvania and NBER. Elena Loutskina and Daniel Murphy are with the University of Virginia Darden School of Business. We would like to thank

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confidence: 81%

Drilling and Debt

Gilje¹,

Loutskina²,

Murphy

2020

The Journal of Finance

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“…See, among others, Mian and Sufi (), Mayer, Pence, and Sherlund (), Loutskina and Strahan (, ), Campbell, Giglio, and Pathak (), Keys et al (), Keys, Seru, and Vig (), Rajan, Seru, and Vig (), Piskorski, Seru, and Vig (), Melzer (), Berndt, Hollifield, and Sandas (), Mian and Sufi (), Agarwal et al (), Demyanyk and Van Hemert (), Stanton and Wallace (), Demiroglu and James (), Nadauld and Sherlund (), Purnanandam (), Acharya, Schnabl, and Suarez (), He, Qian, and Strahan (), and Mayer et al ().…”

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confidence: 99%

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market

Piskorski¹,

Seru²,

Witkin

2015

The Journal of Finance

215

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We quantify the extent to which buyers received false information about the true quality of assets in contractual disclosures by intermediaries during the sale of mortgages in the $2 trillion nonagency market. We construct two measures of misrepresentation of asset quality --misreported occupancy status of borrower and misreported second liens --by comparing the characteristics of mortgages disclosed to the investors at the time of sale with actual characteristics of these loans at that time that are available in a dataset matched by a credit bureau. About one out of every ten loans has one of these misrepresentations. These misrepresentations are not likely to be an artifact of matching error between datasets that contain actual characteristics and those that are reported to investors. At least part of this misrepresentation likely occurs within the boundaries of the financial industry (i.e., not by borrowers). The propensity of intermediaries to sell misrepresented loans increased as the housing market boomed. These misrepresentations are costly for investors, as ex post delinquencies of such loans are more than 60% higher when compared with otherwise similar loans. Lenders seem to be partly aware of this risk, charging a higher interest rate on misrepresented loans relative to otherwise similar loans, but the interest rate markup on misrepresented loans does not fully reflect their higher default risk. Using measures of pricing used in the literature, we find no evidence that these misrepresentations were priced in the securities at their issuance. A significant degree of misrepresentation exists across all reputable intermediaries involved in sale of mortgages. The propensity to misrepresent seems to be largely unrelated to measures of incentives for top management, to quality of risk management inside these firms or to regulatory environment in a region. Misrepresentations on just two relatively easy-to-quantify dimensions of asset quality could result in forced repurchases of mortgages by intermediaries up to $160 billion.Acknowledgments:

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“…Mian, Rao and Sufi () find that a one‐standard‐deviation increase in household leverage is associated with a 5% to 13% decline in consumption. Melzer () shows that homeowners with negative equity significantly cut back on home improvement and mortgage principal payments, and Ferreira, Gyourko and Tracy () estimate that they are one‐third less mobile. Feldstein () argues that declining house prices and the resulting debt overhang problems are sufficiently detrimental to consumer spending and labor mobility to justify large‐scale regulatory programs that reduce mortgage principals for highly levered households.…”

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confidence: 99%

Estimating Loan‐to‐Value Distributions

Korteweg

Sørensen

2015

Real Estate Economics

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We estimate a model of house prices, combined loan‐to‐value ratios (CLTVs) and trade and foreclosure behavior. House prices are only observed for traded properties and trades are endogenous, creating sample‐selection problems for existing approaches to estimating CLTVs. We use a Bayesian filtering procedure to recover the price path for individual properties and produce selection‐corrected estimates of historical CLTV distributions. Estimating our model with transactions of residential properties in Alameda, California, we find that 35% of single‐family homes are underwater, compared to 19% estimated by existing approaches. Our results reduce the index revision problem and have applications for pricing mortgage‐backed securities.

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Mortgage Debt Overhang: Reduced Investment by Homeowners at Risk of Default

Cited by 134 publications

References 63 publications

Drilling and Debt

Drilling and Debt

Asset Quality Misrepresentation by Financial Intermediaries: Evidence from the RMBS Market

Estimating Loan‐to‐Value Distributions

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