The politics of mortgage credit expansion in the small coordinated market economies

Abstract

Recent contributions to the comparative political economy literature claim that liberal market economies are vulnerable to asset booms and busts because of financial deregulation, shrinking welfare states and a political ideology emphasising financial self-sufficiency. This article examines the rapid expansion of mortgage lending in three coordinated market economies (CMEs): Denmark, Sweden and the Netherlands. This expansion is puzzling given that all three countries are CMEs with generous welfare states. Yet the pattern of mortgage lending resembles the Anglo-Saxon or liberal market economies (LMEs) more than other CMEs. The article argues that mortgage bubbles in the small CMEs emerged as the unintended outcome of pairing neoliberal programmes to expand home ownership with collectivist housing institutions. This resulted in supply restrictions and rising property values which saddled households with extraordinarily high mortgage debts. In short, mortgage credit bubbles are not unique to Anglo-liberal welfare states and may have different origins.     

The Financial Crisis: A Retrospective

Government efforts to manage the financial crisis and to promote economic recovery have been extensive over the past three years. Hundreds of billions of dollars have been distributed—and much of it now repaid—from the Troubled Asset Relief Program. The Federal Reserve holds more than $2 trillion in mortgage‐backed securities, collateralized loans to financial institutions, and other assets and liabilities to maintain liquidity in the financial markets. The American Recovery and Reinvestment Act injected more than $600 billion into the economy through tax breaks, loans, contracts, grants, and entitlements. Congress also passed the Dodd‐Frank Wall Street Reform and Consumer Protection Act in 2010. Yet economic recovery remains flat. The author examines the reform effort to date, key points of its primary focus, and the politics of implementing the reform as a factor in eventual economic recovery. One component of the reform, the creation of a Consumer Financial Protection Bureau, holds the greatest potential for changing the way consumers participate in the financial markets, but also has drawn the greatest debate and opposition. While regulatory reform alone will not revive the economy, a newly conceived and broadly participatory Consumer Financial Protection Bureau could simplify and streamline the complex linkages that contribute to the supply of credit.     

A study on loan approval and non‐performing asset—Segment identification

Nonperforming assets (NPAs) are a huge challenge infront of the Indian economy. Accumulating NPA is forming a burden and obstacle for economic growth. Financial institutions are struggling with nonperforming loans, and their efficiency is getting tremendously impacted. The aims of this study are to find out the critical factors for granting mortgage loan and to develop a formula that can help financial institutions in identifying and differentiating a possible loan defaulter from a non‐defaulter. The formula developed and the identification of defaulters could help in reducing NPA of financial institutions. Managers and loan approvers can use this model to grant loans to verified borrowers and can also keep an eye on their existing customers.     

Innovation and the cost of mortgage credit: A historical perspective

Abstract

Since the inception of U.S. institutional mortgage lending in the 1830s there have been major changes in mortgage instruments, the delivery system, and funding sources. Some of these changes qualify as innovations that have lowered the cost of credit and increased its availability. This article divides the history of U.S. mortgage finance into three periods and identifies the source and type of major innovations.

The “Origins” period, from 1831 to 1931, included the development of many mortgage lending institutions and instruments. The second era, “A Wonderful Life,” featured a government‐supported special circuit that dominated mortgage finance from 1932 to 1981 and witnessed development of mortgage‐backed securities. The current era, “A Brave New World,” features a new system of credit delivery dominated by specialized institutions and technology. In it, application of automated underwriting and artificial intelligence may have far‐reaching effects on the market and the accessibility of low‐income households to mortgage credit.     

Responding to the foreclosure crisis

Abstract

Regional economic downturns, speculation on skyrocketing home prices, and rampant unfair and deceptive mortgage lending practices have combined to create the perfect foreclosure storm in America. More than 2 million foreclosures are expected to occur during the next 12 to 18 months. Common to all three of these contributing factors is the reality that effective regulation of the mortgage market would have greatly limited damage from foreclosures.

This article traces the origins of the subprime market crisis and the resulting impact of foreclosures on the housing market, minority households, and the economy. The article also reviews the effectiveness of current interventions to mitigate or limit foreclosures and recommends broader solutions to help families maintain their homes.     

On the political economy of the financial crisis and bailout of 2008–2009

U.S. policies to promote home ownership and other banking regulatory decisions helped to create a highly leveraged international market for mortgage-based securities. Declines in the price of housing, consequently, had major effects on the balance sheets and portfolios of financial institutions throughout the world. The political response to the financial crisis has been rapid and large. In general, differences in the effectiveness of government policies show the advantage of standing institutions at crisis management relative to innovative legislation.     

Evidence and Actions on Mortgage Market Disparities: Research,Fair Lending Enforcement,and Consumer Protection

ABSTRACT

In this article, we present an overview of the research on discrimination in mortgage underwriting and pricing, the experiences of minority borrowers both prior to and during the financial crisis, and federal efforts to mitigate foreclosures during the crisis. We next discuss the history of legal cases alleging disparate treatment of minority borrowers, and recent cases alleging disparate impact in the wake of the Supreme Court’s Inclusive Communities decision. Using these discussions as a background, we examine and discuss mortgage regulations issued by the Consumer Finance Protection Bureau following the financial crisis, describe recent developments in the FinTech industry and explore the implications for fair lending policy and minority borrowers more generally. Finally, we draw conclusions and make recommendations for improving the mortgage market outcomes of minority borrowers and increasing minority borrowers’ access to credit.     

Beneficiaries of federal housing programs: A data reconnaissance

Abstract

This article reports on a reconnaissance of information systems containing data on the beneficiaries of direct and indirect federal housing expenditures. It covers data in the U.S. Departments of Agriculture, Housing and Urban Development, Veterans Affairs, and the Treasury; the Resolution Trust Corporation; financial regulatory agencies; and secondary mortgage market actors.

Data varied widely across agencies in availability, accessibility, and quality. Data are more systematically collected for low‐income beneficiaries of housing programs than for the more affluent beneficiaries of indirect housing expenditures. The systems need improvements in data quality and coverage and database format, though they have improved recently. Many research topics can be explored with new and underused data systems: the characteristics of beneficiaries of rural housing programs, urban rental housing programs, low‐income homeownership programs, and mortgage guarantee and insurance programs. But the lack of information on the systems themselves makes data difficult to locate and access.     

Sub-prime mortgage lending: a cultural economy

Abstract

Developing cultural economists’ concerns with the assembly of agency in financial markets, agency in sub-prime mortgage lending in the United States is shown to have been made up through calculative devices of risk. Credit reporting and scoring provided for the targeting, sorting, pricing and governing of customers in terms of risk. The securitization of mortgages into risk-structured financial instruments made possible extended lending. Interest-only adjustable rate mortgage products called up mortgagors who, as leveraged investors, embraced risk in a rising property market. The current sub-prime mortgage crisis is understood in critical terms as a moment when the contradictions of these risk devices and their incapacity to capture the uncertain future have come to the surface, and agency in sub-prime lending has been disassembled. Cultural economy is thus shown to make a distinctive contribution to the politicization of sub-prime that stresses the ambiguous politics of calculation.     

Ideas and Coordination in Policymaking: The Financial Crisis of 2007–2009

Policy change occurs because coalitions of actors are able to take advantage of political conditions to translate their strong beliefs about policy into ideas, which are turned into policy. A coalition's ability to define a problem helps to keep policies in place, but it can also cause coalitions to develop blind spots. For example, policy subsystem actors will often neglect the need for coordination between governmental actors. We examine the financial crisis of 2007–2009 to show how entrenched policy ideas can cause subsystem actors to overlook the need for policy coordination. We first analyze the prevalent idea that policymakers should aim to keep inflation low and stable while employing light touch regulation to financial markets. We then demonstrate how this philosophy led to a lack of coordination between monetary and regulatory policy in the subprime mortgage market. We conclude with thoughts about the need for coordination in future economic policy.     

How Did the Spanish Financial System Survive the First Stage of the Global Crisis?

This article analyzed the impact of the global crisis on the Spanish financial system between 2008 and 2010. It shows that, overall, the performance of the largest Spanish financial institutions was positive. The article examined why, and outlined some lessons. It contendedthat this response was largely driven by institutional, political, and cultural factors. At the same time, the article showed that as the crisis intensified, Spain's banking sector could not escape its dramatic effects. Deteriorating economic conditions, the implosion of the real estate market, the dependence on wholesale funding, weaknesses in the regulatory framework, and the role of the Bank of Spain all helped to explain this reversal. Finally, the article considered the Spanish experience within the framework of the varieties of capitalism literature. It showed that differences among financial systems persist. Indeed, in Spain, the crisis has led to extensive regulatory intervention, reinforcing the preexisting model.     

Capturing the Moment? Crisis,Market Accountability,and the Limits of Legitimation

This article extends the concept of regulatory capture to a prominent element of responses to the 2007–2008 global financial crisis overlooked in political science: the out-of-court settlements undertaken between regulators and financial firms. In outsourcing accountability to markets and diverging from previous crisis responses, these billion dollar agreements have remained highly controversial. How have financial regulators sought to legitimate this novel approach to post-crisis accountability? Contrasting material and cognitive conceptions of regulatory capture, I illustrate how American financial regulators have persistently prioritized market values in self-legitimating post-crisis financial accountability. Inconsistencies in the stress on transparency and growth, however, are shown to undermine the wider legitimation of this market-based approach. These limits underpin the scepticism with which post-crisis settlements have been received, as well as to the broader sense that accountability for the most severe period of volatility since the Great Depression has remained lacking.     

Wasting a Crisis? Democracy and Markets in Britain after 2007

The banking crisis of 2007-2008 briefly threatened to overturn a system of market government that had lasted for nearly three decades—a system designed to minimise democratic control over markets. The crisis drew politicians once more into financial politics and exposed bankers and banking institutions to popular criticism and control. But the development of regulatory debates, and of the institutions designed to manage the crisis, have combined to avert this threat to the established order. The crisis is being 'wasted': it is failing to produce radical reforms. The paper establishes the intellectual and institutional origins of this failure, and argues that, while the reform window is closing, it is not yet fully shut: there exists yet scope for radical argument and popular mobilisation in the creation of a financial system with fewer pathological features.     

Development of Local Government Debt Financing Markets: Application of a Market‐Based Framework

Needed is clear guidance on how to develop market‐based debt financing systems in transitional and developing countries. We propose an analytical framework useful for identifying constraints to financial development and providing recommendations to overcome constraints to develop municipal financing capacity. The proposed framework is applied to five country case studies: Indonesia, Mexico, Philippines, Poland, and South Africa. The thesis of this paper is that municipal credit market development is related to improvements in the legal/regulatory framework governing local borrowing, the capacity of financial institutions to assess risk, and borrower capacity to support and manage debt.     

The reverse mortgage as an asset management tool

Abstract

Reverse mortgages are usually seen as a vehicle for increasing the income of poor, elderly households. This perspective, coupled with the relatively slow growth of reverse mortgage programs, has led some observers to question the growth potential of the reverse mortgage market. This article presents a more expansive view of reverse mortgages as a financial tool for tapping housing equity for various purposes and at various stages in the life cycle.

Three market segments for reverse mortgages are discussed: elderly persons living alone, other elderly households, and non‐elderly households. Potential uses include turning housing equity into personal human capital investment accounts, enabling children to provide care for their disabled parents, funding elderly households’ long‐term care insurance, and sustaining consumption. Recent progress in product development and availability and political pressures to find private financing for health and long‐term care suggest that the reverse mortgage market has considerable growth potential.     

Financial industry mobilisation and securities markets regulation in Europe

The 2007–2009 financial crisis has led to considerable debate about the role of financial industry actors in global regulatory processes. This article seeks to contribute to this debate by assessing when and why financial industry actors mobilise in order to influence securities markets regulations. Do these mobilisation patterns suggest undue influence by a small set of powerful industry actors, or do they reflect the engagement of a more diverse set of actors representing broader public interests? It is argued that variation in mobilisation patterns is a function of: (1) institutional opportunity (the openness and accessibility of regulatory politics); and (2) demonstration effects (how crises increase the salience of regulatory issues). Empirical analyses suggest that the financial crisis diminished the diversity of mobilising actors. This trend, however, is reversed when the news media disseminate information about the costs of weak financial regulation and thereby increase the salience of regulatory issues.     

The Impact of Federal Preemption of State Antipredatory Lending Laws on the Foreclosure Crisis

State antipredatory lending laws (APLs) are designed to protect borrowers against predatory lending that can increase the risk of default and deplete the home equity held by borrowers. Federal regulators instituted preemption that limited the scope and reach of state antipredatory lending regulations for certain lenders. Based on the variation in state laws and the variation in the regulatory environment among lenders, this paper identifies the effects of federal preemption of state APLs on the quality of mortgages originated by preempted lenders. The results provide evidence of a relatively higher increase in default risk among loans exempted from strong state antipredatory laws. These results are most robust among refinance mortgages with adjustable interest rates—a large and highly dynamic market in the period of analysis. The findings provide initial evidence that preemption of state mortgage lending regulations may result in an increase in mortgage default risk, thus limiting consumer protection in the residential mortgage market.     

Not All Housing GSEs Are Alike: An Analysis of the Federal Home Loan Bank System and the Foreclosure Crisis

While the financial crisis of 2008 ultimately affected the range of U.S. financial institutions, it began with practices in home ownership finance. The Federal Home Loan Bank (FHLBank) System was the first instrumentality created by the U.S. government, in 1932, to sustain affordable home ownership finance. In this article, the authors ask what role, if any, the FHLBanks played in the subprime lending and securitization practices that precipitated the current crisis. The authors analyze publicly available FHLBank financial data in terms of a framework focused on the System's assets: advances; mortgage loans acquired from members; and investments, particularly in mortgage-backed-securities. They conclude that the FHLBanks did not contribute significantly to problematic practices. Nonetheless, they recommend consideration of three reforms to the FHLBanks to ensure a return to effective regulation and responsible, affordable home ownership finance.     

Regulatory lags,liberalization, and vulnerability to banking crises

This article explores the effect of delays in updating prudential regulation on the likelihood of a country experiencing banking crises, and it disentangles the impact of different aspects of regulation on crisis onset. I argue that delays in revision to banks' prudential regulation allow banks to adopt risky behavior, which increases a country's vulnerability to systemic banking crises. This effect, however, is conditional on the level of liberalization of the financial market. At lower levels of liberalization, banks have stronger incentives to escape the constraints of regulation and to take advantage of regulatory lags. At high levels of liberalization, the effect of regulatory lags is curbed, possibly by market discipline. Statistical analyses on a sample of developed and developing countries from 1974–2005 support this argument and help rule out the competing learning hypothesis. These results suggest that the effects of institutions can vary with the passage of time.