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Foreclosure Externalities: Some New Evidence
Foreclosure Externalities: Some New Evidence
Source: Federal Reserve Bank of Atlanta
In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in "above average" condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.
The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury
The Devil’s in the Tail: Residential Mortgage Finance and the U.S. Treasury
Source: Federal Reserve Bank of Atlanta
This paper seeks to contribute to the U.S. housing finance reform conversation by providing a critical assessment of the various types of policy proposals that have been offered. There appears to be a broad consensus to maintain explicit government guarantees for certain narrowly defined borrower populations, such as Federal Housing Administration insurance guarantees for low- and moderate-income and first-time homebuyers. However, the expected role of the federal government in the broader housing finance system is in dispute. The expected role ranges from no role to insuring against only extreme or tail events to insuring against all losses. However, most proposals agree that any public insurance be priced and available only for loans meeting specified criteria to limit taxpayer exposure.
A Closer Look at Nonparticipants During and After the Great Recession
A Closer Look at Nonparticipants During and After the Great Recession
Source: Federal Reserve Bank of Atlanta
This paper uses matched individual-level data from the Current Population Survey to determine that around the 2008 recession, there was a significant upward shift in trend of the share of labor force leavers giving “Schooling” and “Other” as the reason for absence from the labor market. This trend shift is observed primarily among workers between the ages of 25 and 54 and is widespread across all educational groups with at least a high school degree. In addition, the upward shift in the trend of the schooling reason share occurred among workers previously employed in occupations and industries with varying degrees of job losses during the recession. This shift suggests it was a widespread phenomenon and not isolated among sectors or occupations that suffered the most during the recession. The implication is that the upward shift in the schooling reason share has more likely been a response to lower opportunity costs of schooling during economic downturns rather than the result of workers trying to overcome skill mismatch in the labor market. In addition, since transition rates to the labor force are highest among those giving “Schooling” and “Other” as reasons for absence, the decline in labor force participation since 2008 is likely more transitory than permanent.
Presentation Videos — Bridging the Border: Reinforcing Ties between the U.S. and Mexico – April 12, 2012
Bridging the Border: Reinforcing Ties between the U.S. and Mexico – April 12, 2012
Source: Federal Reserve Bank of Atlanta
The April 12 panel, moderated by Atlanta Fed President and CEO Dennis P. Lockhart, explored the long-standing relationship between the United States and Mexico, two countries bound by history, geography, and trade.
Mexico has experienced a decade of relative stability, thanks to a series of fiscal and monetary reforms, explained Ed Skelton, a business economist at the Dallas Fed. Those reforms include central bank independence, fiscal discipline, and the adoption of a formal inflation target.
The country’s electoral system has also undergone extensive reforms, making it one of the most impartial systems in the world, said Robert Pastor, director of American University’s Center for North American Studies. Pastor argued that it is time for the United States, Canada, and Mexico to refocus on the hemisphere, where trade relations have stalled since 2001.
EconSouth Examines How Trucks Move the Economy
EconSouth Examines How Trucks Move the Economy
Source: Federal Reserve Bank of Atlanta
With trucks responsible for moving more than two-thirds of the nation’s goods, the industry is inextricably linked to the health of the U.S. economy. In “Truckonomics: An Industry on the Move,” associate editor Nancy Condon explores the factors affecting the industry.
Given trucking’s linkages to the national economy, perhaps it’s no surprise that the industry was hit hard by the 2007–09 recession. As demand plummeted, carriers were forced to lower their rates. Many smaller companies failed or were bought by larger companies.
Postrecession, the industry faces a new set of challenges, Condon explains. The consolidation that occurred during the downturn left carriers with a shortage of capacity, and the surviving carriers are operating with an aging fleet. Additionally, the industry faces tougher federal regulations and higher diesel fuel prices.
Constrained capacity has an upside for the industry, however. It’s as simple as the law of supply and demand: “Tonnage is up, capacity is down, and so trucking companies have the pricing power to raise their rates,” Condon writes. Though, the industry’s recovery ultimately hinges on overall economic performance, she concludes.
Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis
Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis
Source: Federal Reserve Bank of Atlanta
We present 12 facts about the mortgage crisis. We argue that the facts refute the popular story that the crisis resulted from finance industry insiders deceiving uninformed mortgage borrowers and investors. Instead, we argue that borrowers and investors made decisions that were rational and logical given their ex post overly optimistic beliefs about house prices. We then show that neither institutional features of the mortgage market nor financial innovations are any more likely to explain those distorted beliefs than they are to explain the Dutch tulip bubble 400 years ago. Economists should acknowledge the limits of our understanding of asset price bubbles and design policies accordingly.
Debunking a popular myth about mortgage lending
In their research paper “The New Deal and the Origins of the Modern American Real Estate Loan Contract in the Building and Loan Industry,” Jonathan Rose and Kenneth Snowden discuss financial innovation in the mortgage market in the 1930s. The main focus of the paper is the switch among building and loan societies (B&L) from amortization-by-share-accumulation to amortization-by-direct-reduction. To the typical reader—even one interested in the mortgage market—the topic sounds, to put it gently, quite esoteric. But I think this is an excellent paper and highly relevant to anyone interested in the financial crisis.The authors systematically debunk a highly popular story about the history of mortgage lending in the United States. Rather than explain the story, I will quote Robert Kuttner, who exposited it in The American Prospect in July 2008:Before the Roosevelt era, virtually all mortgages were short term loans of five years or less, typically interest-only, with the principal due and payable at the end. If the homeowner could not roll over the loan, he lost the house. As foreclosures skyrocketed, the New Deal invented the modern, long-term, self-amortizing mortgage.Kuttner is not an economist, but most economists are equally fond of the story. As Nobel Prize winner Franco Modigliani wrote, in a book coauthored with industry expert Frank Fabozzi: “Until [the Depression], mortgages were not fully amortized, as they are now…,but were balloon instruments in which the principal was not amortized, or only partially amortized at maturity, leaving the debtor with the problem of refinancing the balance.”
Modigliani is not alone, as many economists who discuss the history of the mortgage market repeat some version of the story.1 In fact, it appears that the only historical fact that most economists know about the mortgage market is that the federal government invented the amortizing mortgage during the Great Depression.
+ Full Paper (PDF)
Who Is the Most Unemployed? Factors Affecting Joblessness
Who Is the Most Unemployed? Factors Affecting Joblessness (PDF)
Source: Federal Reserve Bank of Atlanta
There has been a deluge of stories in the media about the plight of men in this past recession. Commentators even coined the term “mancession” to describe the relatively worse labor market outcomes men faced during and immediately following the downturn. According to data from the U.S. Bureau of Labor Statistics (BLS), by the end of the recession, men accounted for about three-quarters of job losses, or roughly 4.6 million jobs. This severe drop in male employment was disproportionate to their share of the labor force, which stood at roughly 54 percent at the end of 2007.
The unemployment rates for men and women also showed considerable variations, with the jobless rate for men peaking at 11.2 percent in 2009, compared to the 9 percent peak for women more than a year later. Though men’s unemployment was especially dramatic in the recent downturn, this is not the first time they have been caught in the storm. Indeed, men have experienced higher rates of unemployment during or immediately following recessions since the early 1980s.
One of the most important factors behind the unemployment gender gap is that men are overwhelmingly represented in sectors that are typically hit hard. In construction and manufacturing, for example, from December 2007 to June 2009, employment fell 20 percent and 15 percent, respectively. Women, on the other hand, are heavily concentrated in sectors that are usually more resistant to ups and downs in the business cycle. A prime example is the education and health services sector, where employment actually grew 3.4 percent during this past recession. In addition, women are nearly 50 percent more likely than men to work in the public sector, which also added jobs in the downturn.
Moral Hazard, Investment, and Firm Dynamics
We present a dynamic general equilibrium model with heterogeneous firms. Owners of firms delegate investment decisions to managers, whose consumption and investment decisions are private information. We solve the optimal contracts and characterize the implied general equilibrium. Our calibrated model has implications on the cross-sectional distribution and time-series dynamics of firms’ investment, managers’ compensation, and dividend payout policies. Risk sharing requires that managers’ equity shares decrease with firm sizes. That, in turn, implies it is harder to prevent private benefit in larger firms, where managers have a lower equity stake under the optimal contract. Consequently, small firms invest more, pay less dividends, and grow faster than large firms. Despite the heterogeneity in firms’ decision rules and the failure of Gibrat’s law, we show that the size distribution of firms in our model resembles a power law distribution with a slope coefficient about 1.06, as in the data.
+ Full Paper (PDF)
Does Employing Undocumented Workers Give Firms a Competitive Advantage?
Using administrative data from the state of Georgia, this paper finds that on average, among all firms, employing undocumented workers reduces a firm’s hazard of exit by 19 percent. However, the impact varies greatly across sectors. In addition, a firm is at a distinct disadvantage if it does not employ undocumented workers but its rivals do. The advantage to employing undocumented workers increases as more firms in the industry do so. In addition, the advantage to a firm from employing undocumented workers decreases with the skill level of the firm’s workers, increases with the breadth of a firm’s market, and increases with the labor intensity of the firm’s production process.
+ Full Paper (PDF)
“ViewPoint” Examines National, Regional Banking Trends
“ViewPoint” Examines National, Regional Banking Trends
Source: Federal Reserve Bank of Atlanta
“ViewPoint,” the quarterly report from the Atlanta Fed’s supervision and regulation division, presents the most recent data about banking conditions in the Southeast and nationally. This quarter’s report in Financial Update includes information about small business lending, real estate lending, earnings performance, liquidity, and more.
Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process
Do Borrower Rights Improve Borrower Outcomes? Evidence from the Foreclosure Process
Source: Federal Reserve Bank of Atlanta
Many have argued that laws that give borrowers additional rights can help prevent unnecessary foreclosures by giving borrowers more time to cure their delinquencies or by facilitating workouts. We first compare states that allow power-of-sale foreclosures with states that do not and find that preventing power-of-sale foreclosures extends the foreclosure timeline dramatically but does not, in the long run, lead to fewer foreclosures. Borrowers in states that allow power-of-sale foreclosure are no less likely to cure and no less likely to renegotiate their loans. We then exploit a “right-to-cure” law instituted in Massachusetts in May 2008. We employ a differences-in-differences approach to evaluate the effect of the policy, comparing Massachusetts with neighboring states that did not adopt such laws. We find that the right-to-cure law lengthens the foreclosure timeline but does not lead to better outcomes for borrowers.
+ Full Paper (PDF)
Why Prices Don’t Respond Sooner to a Prospective Sovereign Debt Crisis
Why Prices Don’t Respond Sooner to a Prospective Sovereign Debt Crisis
Source: Federal Reserve Bank of Atlanta
We compare the dynamics of inflation and bond yields leading up to a sovereign debt crisis in settings where asset markets are frictionless to other settings with financial frictions. As compared with the case with frictionless asset markets, an asset market structure with financial frictions generates a significant delay in the response of prices to news about a future debt crisis. With complete markets, prices jump in response to news about the possibility of a future debt crisis. However, when short selling of government bonds is restricted, some agents can’t act on their beliefs, and prices don’t respond to the news. Instead, prices only move in periods immediately prior the crisis.
+ Full Paper (PDF)
The Financial Crisis and Recovery: Why so Slow?
The Financial Crisis and Recovery: Why so Slow?
Source: Federal Reserve Bank of Atlanta
- The U.S. economy has recovered slowly from the recession of 2007 to 2009.
- U.S. history provides no support for linking low employment and high unemployment in the current recovery with the financial crisis of 2007–2008.
- The recent recovery and the recovery after the Great Depression are similar, both of which differ from other recoveries.
- Current discussions about the recovery echo prominent interpretations of the Great Depression, focusing on low aggregate demand or government policies that increase uncertainty or decrease productivity.
Real Time Analysis of the U.S. Business Cycle
Real Time Analysis of the U.S. Business Cycle
Source: Federal Reserve Bank of Atlanta
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee has been dating the U.S. expansions and recessions for the past 60 years. The members of the committee reach a subjective consensus about business cycle turning points, and this decision is generally accepted as the official dating of the U.S. business cycle.
Although careful deliberations are applied to determine turning points, the NBER procedure cannot be used to monitor business cycles on a current basis. Generally, the committee meets months after a turning point (that is, the beginning or end of an economic recession) has occurred and releases a decision only when there is no doubt regarding the dating. This certainty can be achieved only by examining a substantial amount of ex post revised data. Thus, the NBER dating procedure cannot be used in real time. For example, the NBER announced only in July 2003, 20 months after the fact, that the 2001 recession had ended in November 2001.
Some models, however, can gauge how weak or strong the economy is and date business cycles in real time.
Banking Agencies Issue Host State Loan-to-Deposit Ratios
Banking Agencies Issue Host State Loan-to-Deposit Ratios
Source: Federal Reserve Bank of Atlanta
The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency today issued the host state loan-to-deposit ratios that the banking agencies will use to determine compliance with section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. These ratios update data released on June 24, 2010.
In general, section 109 prohibits a bank from establishing or acquiring a branch or branches outside of its home state primarily for the purpose of deposit production. Section 109 also prohibits branches of banks controlled by out-of-state bank holding companies from operating primarily for the purpose of deposit production.
Section 109 provides a process to test compliance with the statutory requirements. The first step in the process involves a loan-to-deposit ratio screen that compares a bank’s statewide loan-to-deposit ratio to the host state loan-to-deposit ratio for banks in a particular state.
A second step is conducted if a bank’s statewide loan-to-deposit ratio is less than one-half of the published ratio for that state or if data are not available at the bank to conduct the first step. The second step requires the appropriate banking agency to determine whether the bank is reasonably helping to meet the credit needs of the communities served by the bank’s interstate branches.
A bank that fails both steps is in violation of section 109 and is subject to sanctions by the appropriate banking agency.
+ Full Document (PDF)
Tax and Nicotine
Tax and Nicotine
Source: Federal Reserve Bank of Atlanta
In the wake of the 2007–9 recession, state governments in the Southeast and across the nation, facing large budget gaps, have scrambled to raise revenues without sacrificing political capital. Cigarette taxes have long been an attractive target, explains staff writer Ed English in “Tax and Nicotine,” featured in the second-quarter issue of EconSouth.
However, as smoking-cessation initiatives and the higher cost of smoking diminishes the number of smokers, English questions the ongoing reliability of this particular vice tax as a source of revenue.
Each southeastern state has either considered or enacted a hike in the cigarette tax rate in recent years, including most recently a $1 per pack increase in Florida in 2010. Those that argue in favor of raising the cigarette tax often point to the economic costs smokers impose on the broader population, which according to the Centers for Disease Control and Prevention (CDC) amount to about $10.47 per pack of cigarettes sold in the United States.
Many supporters of higher cigarette tax rates argue that in addition to generating additional revenues, the hikes also discourage young people from smoking, English notes. Data from the CDC support their claims. The CDC estimates that cigarette consumption among adolescents and young adults decreases 4 percent for each 10 percent increase in price. Smoking rates and cigarette tax trends in the Southeast corroborate these findings: the states with the lowest cigarette tax rates have the highest annual per capita sales.
+ Full Paper (PDF)
Self-employment as Economic Development Strategy: What Does It Mean for Metro and Nonmetro Counties in the Southeastern United States?
Self-employment as Economic Development Strategy: What Does It Mean for Metro and Nonmetro Counties in the Southeastern United States?
Source: Federal Reserve Bank of Atlanta
Self-employment in the Southeast has grown significantly over the past decade as a share of total full- and part-time employment, rising from 14 percent in 2000 to 20 percent in 2008. This 14 percent rise represents an increase of 56 percent, or from 5.2 million people to 8.2 million. A recent study by Anil Rupasingha, community and economic development research economist at the Federal Reserve Bank of Atlanta, finds that self-employment has several very favorable outcomes overall, but there are important differences between self-employment in urban and rural areas, with implications for policymakers and community and economic developers.
Rupasingha reports that in the Southeast, higher rates of self-employment in metro counties reduce poverty. While in nonmetro counties self-employment does improve overall employment and income growth, it does not have the same poverty-reducing effects as in metro counties. This finding suggests that self-employment in nonmetro counties is not lucrative enough to raise individuals out of poverty in the Southeast, but there may not be a sufficient number of wage employment opportunities to offer alternatives.
+ Full Paper (PDF)
Who does what in fighting payments crimes? Explaining the acronyms and roles of agencies
Who does what in fighting payments crimes? Explaining the acronyms and roles of agencies
Source: Federal Reserve Bank of Atlanta
My grandmother always enjoyed a good laugh. I fondly remember her laughter as we listened to Abbott and Costello’s comedy sketch “Who’s on First?” multiple times during every visit to her home. I must admit that at times I can feel like Costello when discussing the many different organizations (and their related acronyms) that play a role in regulatory and legal oversight of financial-related crimes. Though not necessarily as funny as Abbott and Costello’s sketch, the multitude of organizations and their related acronyms in the United States and the roles they play as they relate to financial-related crimes are enough to make even Costello think that St. Louis’s lineup is a breeze to follow. In an effort to allay some of this confusion, let’s examine several organizations involved in the fight against financial and payments-related crimes.
+ Table: Agencies providing regulatory and legal oversight of financial-related crimes (PDF)
Banking — Agencies Release List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies
Agencies Release List of Distressed or Underserved Nonmetropolitan Middle-Income Geographies
Source: Federal Reserve Bank of Atlanta
The federal bank and thrift regulatory agencies today announced the availability of the 2011 list of distressed or underserved nonmetropolitan middle-income geographies where revitalization or stabilization activities will receive Community Reinvestment Act (CRA) consideration as “community development.”
“Distressed nonmetropolitan middle-income geographies” and “underserved nonmetropolitan middle-income geographies” are designated by the agencies in accordance with their CRA regulations. The criteria for designating these areas are available on the Federal Financial Institutions Examination Council (FFIEC) website. The designations reflect local economic conditions, including triggers such as unemployment, poverty, and population changes.
+ 2011 Distressed or Underserved Tract List Excel File | PDF File | Accessible PDF File
