Municipal Debt Issues in Foreign Markets: Managing Currency and Interest Rate Risk

Since the mid-1980s, there has been an acceleration of state and local government interest in the taxable bond market as a source of capital. This has resulted from, among other factors, restrictions imposed on economic and industrial development loan programs resulting from the passage of the Tax Reform Act of 1986. Increased state and local government involvement in the taxable bond markets has increased competition for such capital between the public and the private sectors. In turn, the developing capital competition has expanded into overseas securities markets. Private sector corporations have frequently accessed foreign capital markets to take advantage of lower interest rates and reduced financing costs. By contrast, state and local governments have accessed such markets only recently. This article discusses the policy issues considered by a state or local government entity when it decides to borrow funds in foreign markets and discusses the issues involved in managing currency and interest rate risk when issuing municipal bonds in foreign markets. It includes a review of the hedging techniques used by the Kentucky Development Finance Authority (KDFA) to protect against changes in the Yen/Dollar exchange relationship on a recent Samurai bond issue sold by KDFA as an example of such a transaction.     

THE TROUBLE WITH HEDGE FUNDS

This article examines the impact of hedge funds on the workings of international financial markets and their implications for public policy. In contrast to the neoclassical view of hedge funds, which views them as being‘too‐small‐to‐matter, this article argues that the activities of hedge funds are significant for policymakers because of their ability to become extensively overleveraged and to act as market leaders. I consider the role played by hedge funds in financial crises, market volatility, market manipulation and systemic risk. The article concludes with a critical review of recent proposals for dealing with the public policy issues raised by hedge funds.     

It’s not me,it’s you: the functioning of Wall Street during the 2008 economic downturn

Public officials have blamed Wall Street and its complex financial products for causing the 2008 economic downturn. This article addresses three popular claims saying that complex financial markets are at fault and need more regulation. It argues that even in the midst of a major economic downturn, the much-maligned mortgage-backed securities, collateralized debt obligations, credit default swaps, and unregistered hedge funds functioned almost exactly as designed. When macroeconomic conditions worsened, firms and investors that were paid to assume certain risks had to assume them. Those that opted for safer investment vehicles with more levels of private protection faced fewer problems. Although many investment vehicles lost money, one must differentiate between problems that manifested themselves in markets and problems with the market itself. Even though government policies caused many of the problems, public officials always have an incentive to point the finger at Wall Street and to argue for more regulations when their policies negatively affect markets.     

Budgeting for Time-Bombs: Recent General Accounting Office Reports on the Crises of the Nuclear Weapons Complex and the Savings and Loan Industry

This article discusses an emerging problem—how to budget for time-bombs. Time-bombs are a current or a potential disaster that requires enormous sums of funds to arrest, contain or fix. Two examples are provided: the savings and loan insolvencies and the nation's aging nuclear weapons complex. The author discusses the General Accounting Office reports on those subjects and analyzes how time-bomb budgeting has changed budget processes and decision making.     

建立社保基金投资管理体系的战略思考

我国社保基金的投资管理一直处于十分混乱状态:沉淀于地方省市的1600多亿缴费余额统账混用,没有统一的投资管理策略,回报率低下,存在巨大的金融风险;“全国社保基金”投资策略不尽合理;中央政府不得不额外每年财政转移予以专项补助。将上述三块资源统筹考虑,提出将账户基金、统筹基金、储备基金分离出来,为其设计了不同的投资策略与制度:账户基金应实施完全的资本市场的投资;储备基金应完全走向国际资本市场;统筹基金增值保值问题是个世界性难题,提出应首先完成省级统筹,实行“三离开”的投资原则,并首次提出须避免和谨防“东亚化”的投资倾向,吸取东亚的教训,应为其设立三个投资管理体系。为配合上述投资体系的建立,提出了调整社保缴费比例的设想,认为这个基本框架既符合国际惯例,又符合具体国情,具有中国特色;既有制度创新,又为未来诸如地方开放地方债市等发展留下了空间;既保持了职工收入替代率没有降低,又增强了社保制度的财政可持续性;同时还减轻了国家的财政负担。     

Market segmentation and lender specialization in the primary and secondary mortgage markets

Abstract

This paper provides a comprehensive evaluation of market segmentation and lender/purchaser specialization in the primary and secondary mortgage markets. It describes and assesses the 1990 Home Mortgage Disclosure Act (HMDA) data, which for the first time provide detailed information on the borrower and neighborhood racial and income characteristics of mortgage loan originations and securitizations in the primary and secondary mortgage markets. Evidence presented in the paper indicates that home purchase loan origination rates for black applicants—and, to a lesser degree, Hispanic applicants—appear to be significantly lower than those of other racial or ethnic groups. Similarly, the HMDA data reveal that home purchase mortgage origination rates in predominantly minority census tracts are significantly lower than those in predominantly white neighborhoods. The HMDA data also indicate a striking reliance of black borrowers on government‐backed forms of mortgage credit.

The paper further reveals that secondary market loan purchase distributions arrayed by borrower and neighborhood characteristics generally reflect those of home mortgage originations. The borrower and locational characteristics of home purchase loans acquired by the Government National Mortgage Association (GNMA) directly reflect that agency's legislated specialization in government‐backed loans, whereas the characteristics of loans acquired by Fannie Mae and Freddie Mac for the most part derive from the borrower and geographic composition of conventional home purchase loan originations. Findings of analyses of HMDA data raise concern regarding the access of minority and low‐income households and neighborhoods to mortgage finance. Those results also raise some question as to whether the federally chartered agencies in the secondary market are adequately promoting the availability of mortgage credit to low‐ and moderate‐income and minority households.     

Comment on James H. Carr and Michelle Mulcahy's “Twenty years of housing policy: what's new,what's changed,what's ahead?”

Housing policy in the post Great Recession (GR) era faces tremendous uncertainties, but clearly there will be more sensitivity around risk, quality, and transparency in capital markets. The post-GR domestic policy environment and economy are likely to impose several overarching constraints, including less access to world capital markets for financing housing, more restrictive assessments of risk, and increasing restraints on federal domestic spending particularly for non-entitlement programs. Carr and Mulcahy provide a substantial agenda of liberal-progressive policies that focus on the predatory and risky practices of loan originators and promote expansion of home ownership for low-income households. If we are indeed on the brink of an era of austerity, the housing policy debate will need to focus on priorities for contraction rather than expansion in housing programs, and on tenure-neutral policies rather than promoting home ownership.     

Local government,industrial policy and social consensus: the case of Modena (Italy)

The ‘Emilian model’ has become well known as a case of rapid economic growth based on small firms concentrated in ‘industrial districts’. This paper gives a detailed account of three local industrial policy initiatives adopted in Modena, one of the provinces of Emilia-Romagna in which the features of the model appear clearest. The policy of industrial parks was intended to make land available to firms for their orderly development; the loan guarantee consortium aimed to secure special financing for small firms; and the creation of ‘real service centres’ was directed towards supplying information on technology and markets to industrial districts specializing in particular sectors. In addition to describing these interventions, the paper also seeks to demonstrate that a climate of social consensus and strong credibility on the part of local government are necessary prerequisites for the success of local industrial policies.     

Capital structure and performance: Evidence from a transition economy on an aspect of corporate governance

This paper examines the relationship between the levels of debt in the capital structure and performance for a sample of Indian firms. Existing theory posits a positive relationship; however, analysis of the data reveals the relationship for Indian firms to be significantly negative. The structure of capital markets in India, where both short-term and long-term lending institutions are government-owned, is hypothesized to account for the finding of this relationship, and it asserted that corporate governance mechanisms which work in the West will not work in the Indian context unless the supply of loan capital is privatized.     

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.     

Municipal Bond Sales in Foreign Markets: Experience and Results

This article reviews the issue of state economic development financial incentives and the more development specific issue of engaging foreign capital markets as a source of funds for state industrial incentive in the post-TRA86 environment. An ex post empirical analysis of such a transaction is provided by revisiting the KDFA yen bond transaction. Observations and policy conclusions are also discussed.     

To pay or not to pay: A model of international defaults

Most lenders in international financial markets accede to reschedule overdue payments when sovereign borrowers fail to meet repayment requirements rather than foreclose and force a default. This practice provides borrowers with strong incentives to avoid prompt payment and to sak rescheduling instead. Because lenders cannot distinguish between borrowers who are unable, and those who are merely unwilling, to repay the loan, they will agree to reschedule loans of borrowers who would choose to pay rather than face outright default. This paper augments the traditional lender-borrower model by explicitly considering rescheduling, in addition to default and repayment, and places it in a game theoretic context. It develops a theory of unwillingness to pay, as opposed to inability to pay, and derives strategies by which lenders can at least partially protect themselves against rescheduling requests by borrowers unwilling, but not unable, to fulfill their obligation.     

Preventive servicing is good for business and affordable homeownership policy

Abstract

This article documents the growing importance of preventive servicing—business practices that emphasize early intervention in delinquency and default management practices that also help financially troubled borrowers avoid foreclosure. We suggest that the loan servicing side of the affordable housing delivery system may be underappreciated and undercapitalized.

We use a database of more than 28,000 affordable housing loans to test several preventive servicing‐related propositions and find that after we control for loan and borrower characteristics, the likelihood that a delinquent mortgagor within this universe will ultimately default varies significantly across servicers. This suggests that loan servicing is an important factor in determining whether low‐ and moderate‐income borrowers who fall behind in their mortgage payments will end up losing their homes through foreclosure. It also suggests a need for policy makers to incorporate preventive servicing into affordable homeownership programs.     

Loan delinquency in community lending organizations: Case studies of neighborworks organizations

Abstract

This article reports on qualitative data gathered through interviews conducted in 1996 with key leadership and staff from 13 community lending organizations. Loan servicing and collection procedures within the organizations were examined. Findings suggest that several organizational factors of nonprofit lenders are related to their loan delinquency rates: social networks, business culture, funding sources, composition of the board and loan committees, staff structure, loan intake, and collection tools.

The study also finds that the nonprofit sector's institutional environment and its partnership with the private sector in a mutually beneficial process influence the loan delinquency rate. More specifically, active participation of local bankers in NeighborWorks¹ loan committees, diverse funding sources (from both the public and private sectors), and a diffusion of business practices through dense social networks are related to NeighborWorks’ loan servicing and collection policy and procedures. These factors in turn influence NeighborWorks’ rehabilitation loan delinquency rates.     

Policy incentives and the extension of mortgage credit: Increasing market discipline for subprime lending

The lax underwriting in non‐prime mortgage markets is widely perceived as one cause of the recent difficulties in the housing market. Policymakers are currently considering moves such as enforcing more careful underwriting to provide additional discipline to mortgage markets. This research explores the possibility of another approach to supplement or replace some of these efforts, namely the use of policy to create incentives for Fannie Mae and Freddie Mac (together, the GSEs) to help “check” behavior in non‐prime markets. The hypothesis is that the GSE Act affordable housing goals have increased GSE focus on targeted loan purchases, which in turn has led prime market lenders to compete more aggressively for borrowers on the margin between prime and subprime credit quality. As a consequence, these marginal borrowers will be more inclined to take prime mortgages rather than higher‐cost subprime loans. We test this hypothesis and find empirical support for it. We observe a negative relationship between the growth in GSE market share and the growth in subprime market share over time, and find that the impact of the GSEs on subprime lending tends to be stronger in high‐minority neighborhoods, where subprime lending has been concentrated and growing the fastest. Simulations show that a 10 percent increase in GSE market share (for example, from 20 to 22 percent) can cause 45,000 borrowers using prime instead of subprime loans a cost savings of about $1.7 billion. These results suggest that the GSEs, regardless of their postconservatorship form, should continue to devote attention to serving underserved populations and suggest that significant welfare benefits will accrue. © 2009 by the Association for Public Policy Analysis and Management.     

The provision of public services by government funded decentralized agencies

Public services are often provided by lower level agencies that are funded by higher level government. Since markets for such services do not exist, normal pressures to minimize costs do not operate; indeed, usually these costs are unobservable. We study a principal-agent model which emphasizes the distinction between the financing and provision of public services. Two broad situations are analyzed: (i) the agencies are induced to reveal true costs; and (ii) in addition, to minimize costs, agencies must be induced to exert effort. The characteristics of the optimal funding contract and the marginal cost of public funds are derived in each case.     

中国养老社会保险基金指数化策略分析

由于越来越多的养老基金发起人相信基金管理人不可能取得优于证券市场的表现,再加上他们对指数化策略在解决委托-代理等问题上的企盼,运用指数化策略进行管理的养老基金越来越多。在我国当前养老社会保险基金正准备入市的情况下,对养老基金运用指数化策略的基本原理、运作机制等进行了比较系统的阐述,得出了指数化策略可以作为中国养老社会保险基金的一种投资策略的结论,也许可以为有关决策者提供一点借鉴。     

Temporary Loan Limits as a Natural Experiment in Federal Housing Administration Insurance

The Economic Stimulus Act of 2008 dramatically but temporarily increased the mortgage loan amount eligible for insurance through the Federal Housing Administration (FHA). We use the implementation and expiration of these loan limits as a source of exogenous variation in the availability of FHA insurance to measure the impact on the overall mortgage market and conventional lending. We find that the introduction of higher loan limits increased the number of loan originations, but that the expiration of those loan limits roughly 6 years later did not significantly decrease affected loan originations. The substitution between loan products and small net impact on the overall mortgage market when the ESA loan limits expired may be explained by the return of a stronger conventional lending industry than existed during the housing crisis.     

The Effect of the 2014 Federal Housing Administration Loan Limit Reductions on Homeownership Decisions

ABSTRACT

Using data from the American Community Survey, this article assesses the effects of the 2014 Federal Housing Administration (FHA) loan limit reductions on homeownership decisions. Employing a difference-in-differences identification strategy, we find little evidence that the loan limit reductions caused an overall decline in homeownership rates. However, we do find that overall homeownership rates (as well as African American homeownership rates more specifically) increased in low-price parts of metropolitan statistical areas that experienced a loan limit reduction relative to high-price areas, suggesting that the lack of an overall effect may be because of changing decisions on where to own a home, not whether to own a home. This thesis is further supported by evidence of an increase in commuting times for residents in areas that experienced a limit reduction. Our findings contribute to the debate over how individuals respond and adapt their homeownership decisions to policy changes and credit constraints.