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An originate-to-distribute (OTD) model of lending, where the originator of a loan sells it to various third parties, was a popular method of mortgage lending before the onset of the subprime mortgage crisis. We show that banks with high involvement in the OTD market during the pre-crisis period originated excessively poor-quality mortgages. This result is not explained away by differences in observable borrower quality, geographical location of the property, or the cost of capital of high- and low-OTD banks. Instead, our evidence supports the view that the originating banks did not expend resources in screening their borrowers. The effect of OTD lending on poor mortgage quality is stronger for capital-constrained banks. Overall, we provide evidence that lack of screening incentives coupled with leverage-induced risk-taking behavior significantly contributed to the current subprime mortgage crisis. [ABSTRACT FROM PUBLISHER]

This article examines the auction of a portfolio of collateralized mortgage obligations (CMOs) to major broker dealers and institutional investors. The unique data set allows us to analyze a number of important empirical questions related to the valuation of CMOs by the bidders and the elasticity of demand for the securities. The results reveal that the valuations differ substantially implying a significant elasticity of demand. [ABSTRACT FROM AUTHOR]

This article presents a procedure for evaluating collateralized mortgage obligation (CMO) tranches. The solution procedure is in the spirit of a dynamic programming problem in which an individual mortgagor's decision to prepay is the feedback control variable--the mortgagor seeks to minimize the value of the mortgage subject to refinancing costs. We employ a two-step procedure to solve this dynamic programming problem. The first step uses an implicit finite difference backward solution procedure to determine the "optimal" prepayment boundary for a class of mortgagors, each of whom confronts the same proportional refinancing cost. This step is repeated for several different classes of mortgagors that differ in the level of refinancing costs that they confront. The outcome of this first step is a series of prepayment boundaries--one set of boundaries for each level of refinancing costs (i.e., one set of boundaries for each refinancing cost category of mortgagors). In the second step, the prepayment boundaries determined in the first step are used in conjunction with Monte Carlo simulation to value the CMO tranches. The essence of the second step is that when the simulated interest rate hits the boundary for a particular class, it triggers a prepayment scenario for that class of mortgagors. We conduct extensive sensitivity analysis to determine the robustness of this approach (and our solution procedure) to alternative single-factor models of the term structure of interest rates and to alternative specifications of the distribution of refinancing cost levels confronted by mortgagors. The sensitivity analysis indicates that CMO tranche valuation is not particularly sensitive to alternative models of the term structure so long as the models are consistent with the current yield curve, but, even when alternative specifications of the refinancing cost categories generate nearly identical values for the collateral underlying the CMO (i.e., the generic mortgage-backed securiti [ABSTRACT FROM AUTHOR]

Firms and institutions are monitored and controlled through a complex set of implicit and explicit contractual relations. Because of these agency theoretic relations, institutional behavior in financial markets is not a simple reflection of the preference structures of individuals. Institutional preferences give rise to a demand for new financial instruments and innovations, even when the returns on these instruments are "spanned" in the sense of complete pricing. The innovations can be thought of as solving moral hazard problems. An agency theoretic example serves to illustrate the demand, supply, and financial marketing of stripped securities. In short, institutions matter. [ABSTRACT FROM AUTHOR]

Automated valuation models (AVMs) are widely used in the valuation of pools of residential mortgages. In this paper, we provide evidence that high pricing errors in human and automated valuation models as well as rejection of loans with relatively low appraisals may generate the appearance of appraisal bias even when the original appraisals are unbiased. We also present evidence that the estimated frequency of appraisal overstatement is quite sensitive to assumptions about loan denial rates due to low appraisals as well as the size of and the correlation between AVM and original appraisal pricing errors. [ABSTRACT FROM AUTHOR]

Abstract: Sun, Titman and Twite find that capital structure risks, namely, high leverage and a high share of short‐term debt, reduced the cumulative total return of U.S. REITs in the 2007–2009 financial crisis. We find that mitigating capital structure risks ahead of the crisis by reducing leverage and extending debt maturity in 2006 was associated with a significantly higher cumulative total return 2007–2009, after controlling for the levels of those variables at the start of the financial crisis. We further identify two systematic cross‐sectional differences between those REITs that reduced capital structure risks prior to the financial crisis and those that did not: the exposure to capital structure risks and the strength of corporate governance. On balance, our findings are consistent with the interpretation of risk‐reducing adjustments to capital structure ahead of the crisis as a component of managerial skill and discipline with significant implications for firm value during the crisis. [ABSTRACT FROM AUTHOR]

Collateralized mortgage obligations are derivatives securities based on mortgage loans which issued in different maturities, interest rates and credit ratings. In Iran attention to decision authorities for the first time allowed Iran Melli bank and Maskan bank to issue this kind of securities. One of the main questions in issuing this kind of securities is maximizing the issuer profit by choosing optimum maturity, number and size of each trench. In this paper by using combination of dynamic programming approach and Monte Carlo simulation technique we maximize the profit of issuer by optimizing the maturity of mortgage backed securities (reduce in issuing cost). Considering 3 trenches and up to 8 years maturity with 12% average rate of pool of mortgages, the result of the model determines the maturity of 4, 8 and 3 years respectively for first, second and third trenches. Compared with the proposed 5-years and non-classified mortgages, dynamic programming model leads to rise 1.2% in profit of issuer.

The article offers information on the history, development and significance of the collateral mortgage law in Louisiana with reference to the comprehensive revisions to Article 9 of the Uniform Commercial Code in 2001. It discusses the judicial decision of the Louisiana Supreme Court in the case of Diamond Services Corporation v. Benoit regarding collateral mortgage notes. It analyzes the U.S. Louisiana District Court's decision in KeyBank National Association v. Perkins Rowe Associates LLC.

We develop a new R package that computes the probability density function, the hazard rate function, the integrated hazard rate function, and the quantile function for forty four survival models commonly used in actuarial science. A real data application of the package is illustrated. It is hoped that this package could be useful for actuarial scientists. [ABSTRACT FROM AUTHOR]

The concept of the Good Society--grounded in principles of reciprocity and the Golden Rule--is as ancient as human civilization. To many the concept may appear in conflict with the goings-on of financial markets. This may be especially true after the financial crisis. Financial theory and financial legislation cannot ignore this apparent conflict, but must instead find ways to reduce it. When teaching economics it is important to convey how individuals and organizations impose rules and standards which help reconcile their deeply-held beliefs with their business practices. [ABSTRACT FROM AUTHOR]

The article discusses several legal developments involving the U.S. investment securities laws under Section Eight of the nation's Uniform Commercial Code (UCC) in 2011, focusing on cases involving legal issues such as security interests, New York's Limited Liability Law, and collateralized mortgage obligations (CMOs). In the case Smith v. Powder Mountain LLC, the court deals with a transfer of assets in a security account.

The article focuses on the U.S. court case U.S. Securities and Exchange Commission v. Goldman Sachs, which dealt with fiduciary duties in investment banking. Topics include trust-based agreements, the management and regulation of investment banks in the U.S., and synthetic collateralized debt obligation (CDO) transactions.

A worldwide recession of unusual breadth and depth is causing harm to many individuals and businesses. While the causes are complex, the recession got its start with failures in the subprime mortgage market. The process of creating such loans is complex and often includes securitization after loans are approved. The reasons for the subprime lending mess can be at least partly traced to decisions made by individual mortgage brokers and lending officers. These individuals had moral or ethical responsibilities because of their positions. An analysis of the rights and duties approach to ethics shows that some of these individuals failed in their moral duties and that their failure is partly to blame for the resulting harmful consequences. [ABSTRACT FROM AUTHOR]

This article explores slave mortgages from the 18th and 19th-century public records of Virginia, South Carolina, and Louisiana and considers both the economic and social impact that mortgages had on enslaved people in the Southern States during the period. Some of the subjects considered include the velocity of money, both Colonial and Antebellum policies towards collateral-based issuance of credit based on slaves, both American and British banks and banking practices, international business relations, and the impact of foreclosures on slave families.

This study analyzes the impact of contemporaneous loan stress on the termination of loans in the commercial mortgage-backed securities pool from 1992 to 2004 using a novel measure, based on changes in net operating incomes and property values at the metropolitan statistical area-property-type-year level. Employing a semi-parametric competing risks model for a variety of specifications, we find that the probability of default is extremely low even at very high levels of stress, although the coefficient estimates of greatest interest are very statistically significant. These results suggest substantial lender forbearance and are consistent with previous research that models default as a “gradual dynamic process” rather than a “ruthless” exercise once “in the money.” [ABSTRACT FROM AUTHOR]

This article examines the evolution of real estate investment trust (REIT) capital structure in the new REIT era with a focus on the effects of banking relationships on REIT capital structure. Using a unique sample of REITs from 1992 to 2003, we find that, after controlling for firm characteristics, REITs with banking relationships are more likely to obtain long-term debt ratings and subsequently issue public debt. Moreover, REITs with banking relationships tend to use less secured debt and have lower leverage. These findings support the notion that banking relationships facilitate REITs' access to the public debt markets and help explain why REITs shift from traditional mortgage financing to bank debt and public capital market financing. The results also support the proposition that firm leverage should be positively related to the amount of a firm's secured debt. [ABSTRACT FROM AUTHOR]

In this article the authors examine issues related to the securitization of asset back securities. They focus on the importance of sponsor quality in asset backed securities at the time of the global financial crises of 2008-09 and the subsequent recession. A number topics from the research are addressed including the fact that investors overlooked valuable information about sponsors of asset backed securities, the financial performance of collateralized debt obligations, and the underwriting of bonds based on factors unrelated to risk.

This Article examines whether recent shifts among private and public markets are part of a more general phenomenon of "shapeshifting" among corporate entities. A shapeshift is a transformation of corporate form involving the creation or use of a new legal entity and one or more changes in structure, including capital structure and the allocation of control rights. Shapeshifting includes not only going private and private equity IPO transactions, but forms of public-company regulatory arbitrage and use of variable interest entities, structured investment vehicles, collateralized debt obligations, and related forms. I assess whether the insights of Ronald Coase and Tibor Scitovsky might be relevant to the analysis of shape shifting, particularly private-equity transactions. I examine whether parties might shapeshift over time among seemingly Kaldor-Hicks efficient (or perhaps inefficient) regimes and draw some preliminary conclusions about different shape shifting transactions. I argue that there are parallels between the rationales for shape shifting and Coase's arguments about why transactions take place in firms rather than in markets. Coasian boundary determinations essentially are a function of direct and indirect costs. Shapeshifting is no different, yet regulatory interference leads firms to shift shape in undesirable ways. Specifically, going-private transactions have a stronger normative justification than structured finance transactions, because they are subject to lower direct and indirect costs. I conclude that scholars considering one category of shape shifting might sharpen their normative analysis through comparisons to other shape shifting transactions. [ABSTRACT FROM AUTHOR]

Valuing mortgage-related securities is more complicated than valuing regular defaultable claims due to the borrower's prepayment behavior as well as the possibility of default. Some researchers use a structural-form model to obtain the closed-form formulas for the mortgage value. With this method, however, it is difficult to identify the critical region of early exercise. As an alternative, the reduced-form model developed in this article is able to value the mortgage without setting boundary conditions, and it can thereby accurately handle the multidimensional space of correlated state variables. The purpose of this article is to derive a closed-form solution of the mortgage valuation equation under a general reduced-form model that embeds relevant economic variables. This new approach enables portfolio managers to undertake sophisticated portfolio optimization and hedging analyses. An implementation procedure for the model is also provided to demonstrate how the valuation framework can be utilized in practical applications. [ABSTRACT FROM AUTHOR]

This paper examines whether industry efforts to decrease managerial discretion, increase uniformity, and improve transparency of a non-GAAP performance measure change voluntary disclosure and market perceptions. We find that the frequency of REITs meeting or beating analysts' expectations of funds from operations (FFO) decreases following explicit industry initiatives to discourage manipulation. Concurrent with this shift, we find that the information content of FFO to investors increased, particularly for firms reporting a reconciliation of FFO with GAAP earnings. We also examine firms in other industries to assess alternative explanations for these results, such as SEC intervention. Collectively, our findings suggest that industry guidance about non-GAAP performance curtailed managers' opportunistic reporting. Furthermore, the market response to FFO is consistent with investors perceiving less manipulation and greater reliability. Our evidence also supports the SEC's subsequent requirement that all non-GAAP disclosures be reconciled to the nearest GAAP measures. [ABSTRACT FROM AUTHOR]

In this paper we assess the recent history of house prices and of mortgage lending across Europe. We develop a simple economic framework to estimate the likely contributions of fundamental factors, such as changes in real incomes and population growth, to house price appreciation. We also try to quantify how much of price rises might have been driven by rising expectations of future capital gains. We estimate that this might have played a significant role in several countries, including Spain, Sweden, Belgium, and the UK. We then consider what different types of mortgage arrangement might become attractive in a world of higher house prices, analysing types of indexed mortgage that have advantages where prices are higher relative to incomes and where house prices may be volatile and cannot be assumed to carry on rising. [ABSTRACT FROM AUTHOR]

The appraisal of the “market value” of homes serving as the collateral for mortgages is a fundamental part of the underwriting process. If a loan should default, however, it is not the retail market value that the lender obtains, but rather the “recovery value.” In this research, we show how recovery values differ from market values at origination and explore the reasons for the differences. Using a large sample of chattel mortgages on manufactured homes, we explore the relationship among the selling prices, the book values, and the fitted values from simple hedonic models with spatial autocorrelation. We then address the differences between selling prices at origination and recoveries from repossessed homes. We find that the spread between them varies systematically with home characteristics and especially with “atypicality,” that is, with measures of how unusual a home is. Selling prices both at origination and recovery affect borrower defaults. [ABSTRACT FROM AUTHOR]

This paper presents a discrete-time method (ET method) for pricing path-dependent securities by the supplementary variable technique and examines the ET method from the point of view of Arrow­Debreu event tree. In particular, this paper identifies sufficient conditions on supplementary variables under which the ET method yields the same price for a path-dependent security as a valuation method based on a comparable Arrow­Debreu event tree. Two examples are provided to illustrate the ET method. The first example is a valuation of collateralized mortgage obligations (CMOs), where the collateral of a CMO is modeled as a pool of mortgage loans with heterogeneous prepayment costs. The second example is a valuation of American average options where the average is computed over a moving period with a fixed length. In addition, this paper presents a measure for the computational size of the ET method and illustrates numerical advantages of the ET method with examples. [ABSTRACT FROM AUTHOR]

Outlines the general rules applicable to effectively connected income (ECI) for investment funds of foreign persons in the U.S. Explanation on how the concept of ECI developed in the U.S.; Historical backgroun of the taxation of inbound investment including the use of trade and business concept; Exploration of relevant judicial and administrative development of the trade or business concept in specific areas that may be relevant to the investment funds; Description of collateralized debt obligations and their uses; Selected ECI issues confronting foreign persons who invest in private equity funds.

Examines the mixed collateral amendments of California. California's schemes for enforcing secured obligations; Origin of the mixed collateral problem; Practical history of the mixed collateral problem; Central axiom of the real property system.

This paper investigates the extent to which the supply of collateral affects business formation in the UK. Bank loans are typically secured on the entrepreneur's house. Using a variety of data and formulations, evidence is found that a 10% rise in the value of unreleased net housing equity increases the number of new VAT registrations by some 5%. Since we find that businesses formed in response to increases in the value of housing assets seem to be of at least average quality as measured by survival chances, there appears to be a large pool of untapped entrepreneurial talent. [ABSTRACT FROM AUTHOR]

This study develops a model for the valuation of Collateralized Mortgage Obligations (CMOs). The model is based on a two-factor model of the term structure of interest rates and embeds an empirically estimated mortgage prepayment function. The model is used to analyze various CMO tranches, including standard sequential pay fixed-rate tranches, Planned Amortization Class (PAC) tranches, Targeted Amortization Class (TAC) tranches, floating-rate tranches, Interest Only (IO) and Principal Only (PO) tranches, Z-bonds and Residuals. The results of this analysis illustrate the sensitivity of the various tranches to differences in CMO structure, changes in interest rates, the characteristics of the underlying collateral, and mortgage prepayments. [ABSTRACT FROM AUTHOR]

Presents information on significance of collateral trust mortgage in railroad finances. Factors which had led to establishment of collateral trust mortgage; Purposes for which collateral trust mortgage was used during initial years of its establishment; Ways in which collateral trust mortgage can be used as means of acquiring control of connecting lines.