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Mar 26, 2021 · We document that private mortgage insurance (PMI) companies dramatically expanded insurance issuance on high-risk mortgages purchased by Fannie Mae and Freddie Mac at the tail-end of the housing boom, without changing pricing and despite knowledge of heightened housing risk.
- Neil Bhutta, Benjamin J. Keys
- 2021
- Abstract
- Large Shocks, Uncertainty, and Valuation: The Nature of Risk and Asset Pricing
- Interconnectedness and Opacity
- Reserves, Buffers, and Stress Testing
- Moral Hazard
- The Challenge of Real Estate and Moral Hazard
- Government as A Systemic Actor
- Economic Concentration
- Capital Market Regulation
- Concluding Comments
Since the onset of the COVID-19 crisis, many commenters have highlighted substantial economic and financial differences compared to the mortgage meltdown (Great Recession). At its core, the mortgage meltdown involved opacity with respect to payments, whereas the COVID-19 crisis concerns opacity with respect to health status. Of course, though there...
A striking aspect of economic crises is the dramatic impact on market valuation. This reflects shocks to both the structure of cash flows of projects and to the market pricing operator from changes in the structure of marginal utility of the cash flows that would be consistent with market clearing. In this spirit, dramatic changes in valuation occu...
A basic aspect of COVID-19 is the incredible ease of spread to those nearby, especially for extended periods. Interconnectedness not only is often desirable economically,6but also is a basic cause of contagion. In effect, one’s presence leads to an “externality.” Externalities are central to such basic aspects of economic activity as the liquidity ...
An important feature facing the medical system in 2020 is the adequacy of reserves and buffers. This applied to many different types of equipment, such as ventilators, PPE (personal protective equipment), and masks, as well as hospital space and beds. The issue is about having a flexible enough (or even just-in-time) supply system, but to a degree ...
One of the central features in the Great Recession was the extent of leverage and excesses of financial institutions, particularly in origination and holdings of mortgage-backed securities in various forms, such as considerable subprime origination. Yet despite their instrumental role in seeding the crisis, many of these same institutions were prot...
Many observers have highlighted the central role of housing finance in the Great Recession, including overleveraging by many borrowers and financial institutions.33In significant part the excess risk-taking that this reflected was at the root of the mortgage meltdown and overall crisis in 2008. In contrast, the financing of housing and real estate ...
One of the common messages from the two crises is the extremely important role of government policy and regulatory actions and how these are a major source of systemic risk. Systemic risk refers to risks to the system; it is difficult to identify any large private agent whose actions could pose more risk to the system than those of the government. ...
While changes in economic concentration from the crises has not received so much focus, it is useful to address from a long-term perspective how the crises affected concentration and especially how the regulatory system influenced that. Two particularly significant impacts related to COVID-19 and concentration are the new distinction between “essen...
There are many facets of market regulation with particular significance during the crises (and especially the COVID-19 crisis) in part reflecting the extraordinary levels of price and real volatility (heightening the potential significance of many sources of information including regulatory filings, such as insider trades and corporate disclosures)...
Crises are especially important events in an economy, and much can be learned from them and the ongoing response. In this paper, we highlight and emphasize some of the similarities between the crises of 2008 and 2020, though the events were certainly different in basic respects. We address the question of what we can we learn about both crises and ...
- Chester S Spatt
- 2020
Jan 1, 2021 · This paper posits a new moral hazard problem on the insurer side of the market, which causes the insured party to be exposed to excessive counterparty risk.
Apr 27, 2021 · Moral hazard: The mortgage market exhibits moral hazard if there is a causal relationship between the size of a borrower’s loan liability and default. That is, all else equal, those who face higher leverage ex post default more frequently.
Inflated house-price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults.
Feb 17, 2021 · New mortgage lending hits record level as home sales post sharp but short-lived decline. Strength in new lending fuelled by originations and renewals. Household borrowers react to interest rate environment and shift term preferences. Chartered banks provide the bulk of mortgage financing and deferrals.
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Aug 2, 2021 · Our first key point is that the re-regulation of mortgage debt after the crisis played an important role in reviving capitalist accumulation regimes as both national governments mobilised mortgage debt to mitigate the effects of the crash.
