Essays on Brokers, Financial Intermediaries, and Securitized Mortgages
Open Access
- Author:
- Lopez, Luis Arturo
- Graduate Program:
- Business Administration
- Degree:
- Doctor of Philosophy
- Document Type:
- Dissertation
- Date of Defense:
- February 11, 2019
- Committee Members:
- Brent W. Ambrose, Dissertation Advisor/Co-Advisor
Brent W. Ambrose, Committee Chair/Co-Chair
Jiro Yoshida, Committee Member
Liang Peng, Committee Member
Timothy T. Simin, Outside Member
Austin J. Jaffe, Committee Member - Keywords:
- Real Estate
Agency Theory
Mortgage Securitization - Abstract:
- Although the economic literature documents theoretical agency models that align the incentives between the agents and principals, there are countless anecdotes where the theoretical models do not hold in practice. This dissertation examines the behaviors of brokers and intermediaries in various sectors of the real estate market. The first two chapters focus on real estate brokers in the housing market while the latter two focus on financial intermediaries in the securitized mortgage market. The purpose is to draw lessons or policy implications. In Chapter 1, for instance, I find that homes owned by real estate agents sell at a premium of 2.7 percent (or $4,900) above the sale price of clients' homes. Homes of relatives sell at a premium of 1.3 percent (or $2,360). While prior literature attributes the price disparity to the agents' exploitation of information asymmetry about the market, I argue that the disparity likely derives from the contract rigidity in listing agreements. I show that real estate agents enjoy a low cost to breach contracts and can, therefore, enter or exit the market more easily than clients to obtain desirable prices. The policy implication is that reducing the agents' advantage requires increasing the households' power to breach listing agreements but at the trade-off of reducing the willingness of agents to participate in the market. In Chapter 2, using use artificial intelligence, I identify financial steering activity that is fostered by real estate agents representing sellers. Examining data that allows me to observe private information exchanges between listing and buyer agents, I find that over 13 percent of the homes sold had bidding constraints requiring financed buyers to obtain a pre-qualification letter from an affiliated lender even if pre-qualified with another lender. I also find that while steering decreases the transaction costs sellers experience by screening buyers (as agents representing sellers often proclaim), it decreases the equilibrium price of the average home by about 1 percent (or $1,900). Financial steering also displaces financed buyers (especially African Americans and Hispanics) while it favors cash or corporate investors. These findings present a trade-off that policymakers encounter when designing and enforcing anti-steering or pro-competition regulations in financial markets. In Chapter 3, I empirically examine the monitoring role of trustees in the securitization market for commercial mortgages. Using a natural experiment around mergers that result in servicers (i.e., agents) and trustees (i.e., monitors) falling under the same institutional umbrella, I present evidence that affiliation is associated with a decrease in the servicers' effort made on behalf of investors (i.e., principals). I also find that a servicer-trustee affiliation causes distortions to the cash flows to bondholders and a decrease in the average recovery rate of a delinquent commercial mortgage by up to $0.07 per dollar of outstanding debt, accounting for an economic impact of about $4.53 billion in market-wide liquidation losses. The policy implication is that third-party oversight plays an imperative role in aligning incentives. Finally, in Chapter 4, I examine how affiliation to senior bondholders can influence servicing decisions on delinquent loans in non-agency residential mortgage-backed securities. Making use of a natural experiment involving mergers and acquisitions that resulted in servicers owning investors who in turn have ownership of the bonds the servicers manage, I find that affiliation improves the chances that a loan is liquidated through a non-foreclosure avenue by about 33 percent relative to foreclosure. Moreover, analyzing investment-grade bond holdings, I find no evidence of senior investors responding negatively to servicer-investor affiliations in the RMBS market. Overall, these results suggest that exposing servicers to senior bond holdings through an affiliation with their own investors significantly improves the servicers' behavior.