Other Degree Granting Units
Driven by the conviction that research in Finance is most valuable when it is impactful, my main motivation is to explore ways to improve people’s lives. I came to the realization that relatively little is written on how the household sector can create wealth in a sustainable way. Households rely on access to homeownership to accumulate wealth via home equity build up that they transfer to the generations to come.
The recent mortgage crisis has highlighted the vulnerability of the household sector, a pillar of the economy, to dysfunctions in the housing market that they did not create. My current research investigates ways to enhance resilient homeownership via alternative mortgage designs that disincentivizes defaults during a housing bust and discourages equity extraction and predatory lending practices during a housing boom.
In my paper titled: “Foreclosures and Their Costs: Could They Have Been Avoided? The Case of California during the Mortgage Crisis” published in The Journal of Structured Finance Summer 2020, 26 (2) 9-29; DOI:https://doi.org/10.3905/jsf.2020.1.102https://jsf.pm-research.com/content/26/2/9/tab-article-info ), I study 1528 mortgage defaults in the state of California that led to foreclosures and sale of the property as REO “Real estate Owned” and confirm that substantial losses were incurred to both homeowners and lenders. However, there were losses and gains to both sides. The most striking evidence is that one in four borrowers generated an average profit of $115,000 while their lenders generated an average loss of $93,000 precisely because excessive equity extraction transferred the downside risk on their lenders. My findings highlight the extensive use of adjustable-rate mortgages and the major role they played in fueling the housing market meltdown. In addition, we show that had homeowners kept their homes and weathered the crisis, the recovery of the housing market would have later led to a home equity buildup and many foreclosures would have been avoided.
My second recent paper titled: “Resilient Homeownership: How partnership-based finance would have prevented the 2008 US mortgage crisis” published in the International Journal of Housing Market and Analysis forthcoming Fall 2020 https://www.emerald.com/insight/content/doi/10.1108/IJHMA-04-2020-0045/full/html takes a critical look at the traditional conventional mortgage system and compares it to the diminishing partnership model which is based on profit and loss sharing between the lender and the borrower. We demonstrate that in this model, the underlying conditions that trigger foreclosures i.e. negative equity, overleveraged borrowers because of equity extraction, are eliminated. Using Johansen’s cointegration test we provide evidence of a long-run relationship between the delinquency rates, volume of refinancing, and the change in US HPI during the period 1994 - 2019. Also, a Granger causality test concludes that the volume of refinancing, and the change in the HPI Granger-cause default rates. Additionally, we demonstrate that any 11-year or longer period during 1975 to 2019, has always led to capital gains despite the 2008 recession. The implication of this study is that policy makers ought to rethink the mortgage design to protect the equity a household accumulates over a lifetime thereby enhancing sustainable homeownership.