Finance

A Canary in the Mortgage Market? Why the recent FHA and GSE loan limit reductions deserve attention

A Canary in the Mortgage Market? Why the recent FHA and GSE loan limit reductions deserve attention
Furman Center White Paper

Madar, J. & Willis, M.A.
10/01/2011

On October 1, 2011, the maximum loan size eligible for Federal Housing Administration (FHA) insurance or a guarantee from Fannie Mae or Freddie Mac (known as "Government-Sponsored Enterprises" or "GSEs") dropped in dozens of metropolitan areas around the country. When this change took effect, a segment of the mortgage market in each of these areas instantly lost some or all federal backing. If enough borrowers seeking loans in this segment are unable to find financing, the result will be further downward pressure on the corresponding segment of the housing market. In this report, we use recent mortgage origination data to explore some of the possible implications of this policy change for the housing market and the U.S. mortgage finance system.

Not so Fast: The Realities of Impact Investing

Not so Fast: The Realities of Impact Investing
America's Quarterly

Jonathan Morduch
09/01/2011

At the beginning of 2010, the Indian microfinance sector was a hotspot for impact investors. The promise of impact investing could be seen in the number of investors lining up to participate in the IPO of SKS Microfinance. 

SKS had ballooned from 603,000 borrowers in fiscal year 2007 to 6.8 million in fiscal year 2010.  Most were women in South Indian villages. The founder of SKS, Vikram Akula, had been saluted by Time and the World Economic Forum, and his Harvard-published memoir told the story of an “unexpected quest to end poverty through profitability.” 

But by 2011, the Indian microfinance sector was mired in bad press and political controversy.  Newspapers accused lenders of putting poor villagers in debt and causing suicides. State-level legislation in late 2010 capped interest rates and scared away equity investors.  Borrowers ceased to repay, and SKS’s share price plummeted, dipping below 200 rupees in late August 2011 (from an IPO price of 985 rupees in August 2010). As summer 2011 ended, BASIX—a pioneering competitor of SKS-- very publicly searched for funding to stay afloat.

Both the achievements and challenges in India hold lessons for impact investors. 

Impact investing has been widely touted, with microfinance as a leading example.  The temptation to attract capital by promising macro-impact at a micro-cost is difficult to resist—and India continues to be one of the most important and innovative microfinance markets. But getting the equation right is more complicated than most advocates admit.

Here are seven lessons on challenges, risks and realities drawn from three decades of microfinance ups and downs.

2011 Federal Policy Review

2011 Federal Policy Review
Published by the Women of Color Policy Network, August 2011.

Women of Color Policy Network
08/01/2011

This summary of legislative action pertinent to the Network's federal policy priorities assesses how noteworthy acts and trends in Congress affect the lives of women of color, their families, and communities. Covering the areas of economic security, social equity, and immigration, the brief provides updates on the status of reproductive rights, job creation, safety net programs, and the DREAM Act, among other topics. The Network's assessment of the policy implications indicates that although the federal legislative landscape offers some progressive opportunities for women of color, obstacles to their advancement loom large amongst ongoing budget and deficit reduction negotiations.

Why Finance Matters

Why Finance Matters
Science, vol. 332, 10 June 2011: 1271-1272.

Jonathan Morduch
06/01/2011

Roughly one-half of the world’s adults, about 2.5 billion people, have neither a bank account nor access to semiformal financial services such as “microcredit,” the growing practice in developing nations of providing small loans, typically less than US$500, to self-employed people. But what if they did? Muhammad Yunus, the 2006 Nobel Peace Prize winner and founder of Bangladesh’s Grameen Bank, a pioneering microcredit institution, argues that this lack of financial access means that the poor, especially poor women, can’t obtain the loans they need to build their businesses and get on a path out of poverty. The idea has taken hold: In 2009, for instance, Grameen Bank served 8 million customers; its average loan balance was just $127. Worldwide, microcredit advocates now claim more than 190 million customers. Proof of concept, however, is not proof of impact. Recent studies have found that some efforts to provide small loans have produced surprisingly weak results, and in this issue, Karlan and Zinman provide more evidence that we need to rethink microcredit. Their findings, from a randomized evaluation of microcredit lending in the Philippines, adds to a handful of recent results that suggest that microcredit’s effectiveness has been overstated by studies that selectively focus on success stories.

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?

Does Regulatory Supervision Curtail Microfinance Profitability and Outreach?
World Development 39(6): 949-965, June 2011

Cull, Robert; Asli Demirgüç-Kunt; and Jonathan Morduch
06/01/2011

We combine two datasets to examine whether the scale of an economy’s banking system affects the profitability and outreach of microfinance institutions. We find evidence that competition matters. Greater bank penetration in the overall economy is associated with microbanks pushing toward poorer markets, as reflected in smaller average loans sizes and greater outreach to women. The evidence is particularly strong for microbanks that rely on commercial-funding, use traditional bilateral lending contracts (rather than group lending methods favored by microfinance NGOs), and take deposits. We consider plausible alternative explanations for the correlations, including relationships that run through the nature of the regulatory environment and the structure of the banking environment, but we fail to find strong support for these alternative hypotheses.

Are Land Use Planning and Congestion Pricing Mutually Supportive? Evidence From a Pilot Mileage Fee Program in Portland, OR

Are Land Use Planning and Congestion Pricing Mutually Supportive? Evidence From a Pilot Mileage Fee Program in Portland, OR
Journal of American Planning Association, Vol. 77, 3, 232-250

Guo, Zhan, Asha W. Agrawal & Jennifer Dill
05/09/2011

Congestion pricing and land use planning have been proposed as two promising strategies to reduce the externalities associated with driving, including traffic congestion, air pollution, and greenhouse gas emissions. However, they are often viewed by their proponents as substitutive instead of complementary to each other. Using data from a pilot mileage fee program run in Portland, OR, we explored whether congestion pricing and land use planning were mutually supportive in terms of vehicle miles traveled (VMT) reduction. We examined whether effective land use planning could reinforce the benefit of congestion pricing, and whether congestion pricing could strengthen the role of land use planning in encouraging travelers to reduce driving.

VMT data were collected over 10 months from 130 households, which were divided into two groups: those who paid a mileage charge with rates that varied by congestion level (i.e., congestion pricing) and those who paid a mileage charge with a flat structure. Using regression models to compare the two groups, we tested the effect of congestion pricing on VMT reduction across different land use patterns, and the effect of land use on VMT reduction with and without congestion pricing. With congestion pricing, the VMT reduction is greater in traditional (dense and mixed-use) neighborhoods than in suburban (single use, low-density) neighborhoods, probably because of the availability of travel alternatives in the former. Under the same land use pattern, land use attributes explain more variance of household VMT when congestion pricing is implemented, suggesting that this form of mileage fee could make land use planning a more effective mechanism to reduce VMT. In summary, land use planning and congestion pricing appear to be mutually supportive.

For policymakers considering mileage pricing, land use planning affects not only the economic viability but also the political feasibility of a pricing scheme. For urban planners, congestion pricing provides both opportunities and challenges to crafting land use policies that will reduce VMT. For example, a pricing zone that overlaps with dense, mixed-use and transit-accessible development, can reinforce the benefits of these development patterns and encourage greater behavioral changes.

 

Resource Allocation, Emergency Response Capability and Infrastructure Concentration Around Vulnerable Sites

Resource Allocation, Emergency Response Capability and Infrastructure Concentration Around Vulnerable Sites
First published on: 14 April 2011, forthcoming 2011, Journal of Risk Research, 18pp. doi:10.1080/13669877.2010.547257

J. S. Simonoff, C. E. Restrepo, R. Zimmerman, Z. S. Naphtali, and H. H. Willis.
04/14/2011

Public and private decision-makers continue to seek risk-based approaches to allocate funds to help communities respond to disasters, accidents, and terrorist attacks involving critical infrastructure facilities. The requirements for emergency response capability depend both upon risks within a region's jurisdiction and mutual aid agreements that have been made with other regions. In general, regions in close proximity to infrastructure would benefit more from resources to improve preparedness because there is a greater potential for an event requiring emergency response to occur if there are more facilities at which such events could occur. Thus, a potentially important input into decisions about allocating funds for security is the proximity of a community to high concentrations of infrastructure systems that potentially could be at risk to an industrial accident, natural disaster, or terrorist attack. In this paper, we describe a methodology for measuring a region's exposure to infrastructure-related risks that captures both a community's concentration of facilities or sites considered to be vulnerable and of the proximity of these facilities to surrounding infrastructure systems. These measures are based on smoothing-based nonparametric probability density estimators, which are then used to estimate the probability of the entire infrastructure occurring within any specified distance of facilities in a county. The set of facilities used in the paper to illustrate the use of this methodology consists of facilities identified as vulnerable through the California Buffer Zone Protection Program. For infrastructure in surrounding areas we use dams judged to be high hazards, and BART tracks. The results show that the methodology provides information about patterns of critical infrastructure in regions that is relevant for decisions about how to allocate terrorism security and emergency preparedness resources.

Microfinance and Social Investment

Microfinance and Social Investment
Annual Review of Financial Economics, vol. 3, ed. Robert Merton and Andrew Lo. 2011: 407-434.

Conning, J. & Morduch, J.
04/08/2011

This paper puts a corporate finance lens on microfinance.  Microfinance aims to democratize global financial markets through new contracts, organizations, and technology. We explain the roles that government agencies and socially-minded investors play in supporting the entry and expansion of private intermediaries in the sector, and we disentangle debates about competing social and commercial firm goals. We frame the analysis with theory that explains why microfinance institutions serving lower-income communities charge high interest rates, face high costs, monitor customers relatively intensively, and have limited ability to lever assets. The analysis blurs traditional dividing lines between non-profits and for-profits and places focus on the relationship between target market, ownership rights and access to external capital.

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