Working Papers

• What Went Wrong? Examining Moody's Rated CDO Data   Abstract

  The downgrading of the tranches of Collateralized Debt Obligation (CDO) products backed by real estate related assets has caused severe disruptions in the housing and financial markets. The rating agencies have been criticized for the opacity in the rating process of the CDO products and also for giving the CDO tranches higher ratings than they deserved. However, not enough attention has been paid to the decision making process of the agencies to downgrade the CDO tranches. We use data from Moody's CDO database to reconstruct the process through which Moody's eventually downgraded the tranches. We use a discrete hazard rate model to study the variables that were relevant in the downgrading of the tranches of the CDOs. The empirical results show that out of the many CDO specific variables relevant to their ratings made available by Moody's few have any explanatory power beyond the Moody's Deal Scores (MDS). We show that the MDS could be explained by the changes in the Case-Shiller Composite-20 Index and Markit ABX.HE indices. Further analysis shows that Moody's mostly relied on the changes in the Case-Shiller indexes in revising the MDS.  Close

• Dynamics of Unemployment and Home Price Shocks on Mortgage Default Rates   Abstract

  This paper uses a Structural Vector Autoregression (SVAR) model to study the dynamics of the impact of unemployment and home price index shocks on mortgage default rates from 1979 to 2000 and from 2001 to 2010. We first fit the model to the 1979 to 2000 sample and forecast the changes in the national and regional mortgage default rates from 2001 to 2010. The model did a good job in forecasting the actual changes in the mortgage default rates from 2001 to 2007; however, it failed during 2008 to 2010. The results for the 1979 to 2000 and 2001 to 2010 periods indicate that the dynamic response of the mortgage default rate to unemployment and home price index shocks changed at the national, regional and state levels after 2000. Unemployment and home price shocks seem to have become more important during the 2001 to 2010 period. The two shocks are responsible on average for about 60% of the movement in the regional mortgage default rates during this period. Except for the Pacific region, California and Florida, most of the variations in the mortgage default rates at the national, regional and state levels are explained by the unemployment shocks. The post 2000 results could be attributed to the increase in the number of mortgage loan borrowers who were more susceptible to unemployment and negative home price shocks.  Close

• Co-movement of State's Mortgage Default Rates: A Dynamic Factor Analysis Approach   Abstract

  Underestimated default correlations of the underlying assets of Collateralized Debt Obligation (CDO) products have been partially blamed for the initial inaccurate ratings. Given the increasingly reliant on mortgage related assets in CDO products, a way to test the underestimation default correlation theory is to estimate how mortgage loan defaults have co-moved across states over time. In this paper, we use a dynamic factor model to estimate the co-movement of mortgage loan default rates across states. The results show that with only one latent factor about 62% of the variation in the states mortgage default rates could be explained when the full sample, 1979 to 2010, is used. However, limiting the sample from 1979 to 2003, the factor explains only 28% of the default variation. There was not much co-movement until the beginning of the 1st quarter of 2007 to 2009. This implies that the initial assigned default correlations were perhaps not inaccurate. An examined relationship between the latent factor and some national variables show a positive correlation between the factor and the St. Louis Fed's Financial Stress Index, and a negative correlation for percentage change in GDP, Retail and Food Services Sales and Consumer sentiments. The factor seems to be a leading indicator for Retail and Food Sales and the percentage change in the GDP.  Close

Works in Progress

• "Property Tax Incidence and Rental Housing:Evidence from NYC Rental Properties Data"
• "Affordable Housing Policies: A look at the NYC 421a Exemptions Program?"
• "The Impact of Homeless Shelters on Property Values"