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Essays in real estate finance : mortgage contract terms, pricing and behaviour Wetzel, Jacob Anders

Abstract

This thesis is a collection of three essays in Real Estate Finance. The first essay examines the determinants of commercial mortgage contract terms. A cornerstone of finance theory is that risk and return should be positively related. However, existing empirical studies often find a negative relationship between interest rates and risk terms in mortgage contracts. Previous studies have found such results puzzling, and have surmised that they may arise because traditional models do not explicitly account for the simultaneous determination of interest rates and loan terms. We therefore specify separate supply and demand equations for loanable funds, and then examine mortgage contracts as equilibrium outcomes of a multidimensional negotiation between borrower and lender. Our empirical results reveal that borrowers and lenders individually require higher returns for greater risk, as theory requires, but that this can produce apparently negative risk/return correlations in contract outcomes, as observed in the data. We demonstrate how various risk factors impact the simultaneous determination of equilibrium interest rates and loan terms. The second essay investigates adverse selection in the Home Equity Conversion Mortgages ("HECMs"). The pricing structure used by the Federal Housing Administration ("FHA") does not reflect geographic or cyclical risk. Since HECM's were disproportionately originated in the sand states in the lead up to the 2008 financial crises, the majority of the loans originated between 2005- 2007 were underwater. We ask whether borrowers adversely selected into HECM’s with the intent to exploit mispriced insurance? This appears unlikely: borrowers whose loans terminated with credit limits greater than their homes are worth have been no likelier to exhaust credit than similar borrowers whose loans terminated with credit limits below collateral value. The third essay studies the effect on residential property prices arising from proximity to oil pipelines. The key contributions of the paper are to show that [1] the disamenity effects related to pipeline proximity are highly localized over very short distances [2] the magnitude of the effects are sensitive to the land use of the pipeline easement. Our findings suggest a likely specification bias in studies that use parametric measures of proximity to an environmental hazard.The second essay investigates adverse selection in the Home Equity Conversion Mortgages ("HECMs"). The pricing structure used by the Federal Housing Administration ("FHA") does not reflect geographic or cyclical risk. Since HECM's were disproportionately originated in the sand states in the lead up to the 2008 financial crises, the majority of the loans originated between 2005- 2007 were underwater. We ask whether borrowers adversely selected into HECM’s with the intent to exploit mispriced insurance? This appears unlikely: borrowers whose loans terminated with credit limits greater than their homes are worth have been no likelier to exhaust credit than similar borrowers whose loans terminated with credit limits below collateral value. The third essay studies the effect on residential property prices arising from proximity to oil pipelines. The key contributions of the paper are to show that [1] the disamenity effects related to pipeline proximity are highly localized over very short distances [2] the magnitude of the effects are sensitive to the land use of the pipeline easement. Our findings suggest a likely specification bias in studies that use parametric measures of proximity to an environmental hazard.

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Attribution-NonCommercial-NoDerivatives 4.0 International

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