Most U.S. mortgages are securitized into agency mortgage-backed securities (MBS), which are then traded on the to-be-announced (TBA) forward market. This paper quantifies the effect of the trading structure of the TBA market on borrowers’ mortgage rates, mortgage demand, and consumer spending. Results indicate that loans with less desirable prepayment characteristics benefit more from access to the TBA market, and that TBA eligibility affects borrowers’ decisions to refinance and their consumption of durable goods.
This paper proposes a modification to the structural model of default risk that is currently used by investors, risk managers, and regulators to evaluate bank default risk. The standard model assumes that assets have an unlimited payoff upside and that asset volatility is constant, neither of which applies to bank assets. This leads the standard model to understate banks’ default probabilities in good times. The model proposed in this paper instead assumes banks’ assets are risky debt claims with capped upside making banks’ distance to default much more sensitive to negative shocks.
Read More: https://www.nber.org/papers/w25807
Housing is an important vehicle of wealth accumulation. This paper studies the disadvantages of segregated housing markets on the wealth accumulation of black families. Results indicate that when neighborhoods transitioned from all white to majority black, the rental prices and occupancy rates increased. Moreover, those who were able to buy a home and avoided the elevated rental prices experienced a significant decrease in the value of their homes.
Read More: https://www.nber.org/papers/w25805
This blog post argues that the U.S. bank stress tests should use market measures of the value and riskiness of assets rather than regulatory measures. In particular, the use of regulatory risk-weights leads to a mismarking of the value of the assets held on banks’ books and ignores increases in asset risk during stress conditions. That said, the post concludes that U.S. stress tests have led to an significant increase in capital requirements for large banks and that post-crisis regulations increased the risk-weights of off-balance sheet exposures.