What I learned from Ashlyn Nelson about Liar Loans and Foreclosures

I’ve been writing about the new public ethics of home ownership and foreclosures, including some questions about the defaults among what seem to be higher income mortgage holders.

USC’s Lusk Center sponsored a talk by the extremely gifted young scholar Ashlyn Nelson at Indiana University. She was kind enough to do a recent presentation on two new papers:

Liar’s Loan? Effects of Origination Channel and Information Falsification on Mortgage Delinquency Wei Jiang , Ashlyn Aiko Nelson and Edward Vytlacil


Securitization and Loan Performance: A Contrast of Ex Ante and Ex Post Relations in the Mortgage Market
Wei Jiang , Ashlyn Aiko Nelson and Edward Vytlacil

And I highly recommend you take a look at both manuscripts. First, they are dealing with really significant public policy issues, and second, both studies use a very clever set of research designs and methodologies to get at the complex issue of moral hazard in mortgage lending.

My takeaways are summarized as:

1. Bank-originated, bank-held loans have a much higher survival rate and, thus, lower risk of foreclosures and delinquency.

2. With low-document bank-originated loans, the researchers could not find any observable “red-flags” for poor loan performance at the time of origination. However, among broker-originated low-doc loans, nearly 75 percent of the performance differences came down to issues that were observable at the time the loans were originated. IOW, there was moral hazard for brokers who turned a blind eye to red flags and passed the loans.

3. When the authors first conducted their analysis, they found an association between higher incomes and foreclosures–the relationship that has had me tied into knots for months.

4. Delving into these “liar loans”–the low documentation loans–they use a neat set of reasonings to gather an estimate of potential income exaggeration. Now, this is an estimate of real income for individuals gathered from neighborhood income weighted upwards for the comparative affluence of homeowners. However, it’s a nice idea, and using this approach, they are able to rough out that, on average–on average!!–liars exaggerated their incomes by close to $1,830 a month. That’s a lot. I would love to see the spread on the exaggerations.

5. This means essentially that individual liars were gaming the the debt-to-income ratio in order to get more house than they could really afford. When they got rid of the fudging, the relationship between income and delinquency returned to expectations.

I had to leave before I got to their answers for whether secondary buyers were able to cherrypick better performing loans from banks. So I shall have to read the manuscripts to get at those answers, but from what I could tell from the introduction, if banks were engaging in moral hazard, they weren’t particularly good at it as they got the short end of the stick on a lot of loans.

Ah! This is the sort of scholarship that makes me want to make my own work better!

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Donald Shoup, Land Economics, and Political Economy

Donald Shoup’s work, The High Cost of Free Parking, was the focus onTyler Cowen’s column in the New York Times last Sunday. Parking Today gathered up a bunch of the responses and basically dismisses most of them, and I’m not sure why. The writer seems to think that the discordant discussion derives just from ideology. But eonomists disagree on all sorts of things, and with parking, we don’t really have a lot of data or a ton of studies yet. I don’t think, for example, you can dismiss the question of movement along both the supply and demand curves, and I don’t think you can ignore the externality argument around parking spillovers–because the externality argument about spillovers is one of the reasons why we have all these parking requirements in the first place.

The other weird thing about the Parking Today entry is the suggestion that you have to “actually know Shoup” in order to respond to his ideas.

So in order to establish my street cred, Donald was one of my mentors at UCLA, and I read draft after draft of his wonderful book when I was a PhD student largely because Donald would pay anybody and everybody to read his draft and comment. He was an absolute fanatic about perfecting his arguments and his prose,* and his generosity and commitment to the quality of this work allowed me to read it, get a few hours of wages out of it, and bought me many a pizza when I was otherwise broke. Now, in perfect disclosure, Donald never considered me as a particularly bright student, but that’s because he had far, far more brilliant people to work with, like Jeffrey Brown and Daniel Hess and David King. Nonetheless, he was always wonderful and witty and ready to afflict the comfortable.

That said, I’ve always been convinced by the basics of Donald’s argument, and pretty much any time he tells me something about land economics, I always think he’s right. And even though I am bigger fan of his other work–the stuff that people don’t pay as much attention to, such his award-winning article in JPER on graduated zoning–it’s really hard to overstate the magnitude of his contribution of getting people to critically examine parking requirements.

But what I think we miss in this discussion is the political economy. As in, you can whinge about ideology all you want, but the political economy really influences property and its regulation, and while I love the catchphrase that free parking is a like a fertility drug for cars, I’ve always wondered about the direction of causation. Is it that people use cars because parking is free (or too cheap), or is parking free because drivers and property owners are politically powerful constituencies? IOW, are cars the fertility drug to free parking, and does any of that matter now? Because if parkers are voters and property owners have a vested interest in trying to wedge free parking out of collective provided street space, then the political web holding the regulations in place may be really hard to crack open.

In the discussion over at Marginal Revolution, there was one comment in particular that always messes me up:

Am I the only one who remembers when you had to pay for parking in any reasonable city or town, and the new-fangled strip malls outside of town were advertising free parking, easy in and easy out free parking right in front of the store? Then with the malls, you had the massive tracts of land with the shops concentrated at the center, building up with quick escalators so you could easily get in, park free, and the access every store you might want with a few feet walking, and then head back to your car parked free to head home or to the next shopping mall with free parking? Then malls started adding huge parking garages with free parking so you could park closer for free and not get rained or snowed on. I remember the downtown businesses, including the Sears and Wards and Woolworths calling on government to do something to provide free parking to allow them to compete.

link: Marginal Revolution: Kling on free parking

Ultimately, I think Donald has a pragmatic and useful strategy for going forward: trying to combat the regulatory creep that got us into the free parking boat: creating new types of use and revenue sharing around parking so that property owners in high-congestion areas have an interest in the take from charging, rather than just using their political clout to mandate a supply of parking that people don’t value enough to pay for themselves.

*I will remember forever just how incredibly patient he was in putting this book together. For graduate students who are starting down the publish publish publish as fast as you can road…it was a breath of fresh air.

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A sad farewell to John Chase

John Chase, one of the few urbanists who actually understood Los Angeles, has died. No more wonderful books. But I will miss even more those moments when you would first see him in public, just as you caught a flash of purple or orange or red, and know that Chase was going to surprise you with his intricate facial hair or his unapologetically flamboyant suit because he knew that people needed to feed their eyes as much as their tummies.

I think the best remembrance is here, in LA Curbed:

We heard John speak many more times after that, and were always impressed by John’s passion for the prosaic. He was able to find beauty in the everyday. And he truly, unapologetically loved Los Angeles. His passion was infectious. He helped us appreciate LA’s vernacular–its stucco, its dingbats, its bungalows. To say that John loved camp is misleading. It implies a winking nod towards the vulgar and a certain distant irony. John’s love for the “vulgar” was far more sincere.

link: Remembering the Big, Wonderful Life of Urbanist John Chase : Obits : Curbed LA

Two others:

The announcement from LA Observed.

The write-up in LA Weekly.

Perhaps the best thing to remember him by is my favorite of his books, Everyday Urbanism, written with the wonderful Margaret Crawford.

If there is a heaven, I strongly suspect Mr. Chase is in it, pestering God about sidewalk finishes, and winning the debate.

Fire and climate change

Other than the obvious harm to human life and society, the Russian fires are clearly prompting greater interest in climate change even among the formerly disinclined (e.g., Putin).

This article in this week’s Economist does as nice a job as I have ever seen of explaining why the fires have such significance:

Both heatwaves and heavy precipitation are more common everywhere than they were 50 years ago. Reflecting the latter trend, the Indian monsoon has been seeing more of its rainfall in extreme events than it did in the past. No single one of those events can be directly attributed to climate change; nor can Russia’s heatwave. The pattern of increases, though, fits expectations—and those expectations see things getting worse.

link: Fires and floods: Part of the main | The Economist

They see things getting worse faster from here.