credit markets – Economic Thinking In Action

Evaluating economic damage allegations related to damaged credit

Allegations of economic loss arising from damaged credit history appear in cases involving business damages as well as personal injury torts.

In these cases, the loss allegations generally revolve around a specific economic damage such as a mortgage loan denial or a higher interest rate.

The economic damage calculation and/or rebuttal analysis general involves comparing the plaintiff’s current economic and credit situation to the economic and credit situation that could have been reasonably expected to occur had the incident in question not occurred.

The credit situation that could have been reasonably expected to occur had the incident in question not occurred is typically referred to as the ‘but-for’ scenario.

Confirming the business background of financial services professionals

The NMLS is the legal system of record and free service for consumers to confirm that the financial-services company or professional is authorized to conduct business in their state.

A little bit about what the NMLS Consumer AccessSM provides:

Contains licensing/registration information on mortgage, consumer finance, debt, and money services companies, branches, and individuals licensed by state regulatory agencies participating in NMLS.
Information regarding federal agency-regulated institutions and their mortgage loan originators who are registered with NMLS.
Contains information that is self-reported to regulatory agencies or an individual’s employing institution by the licensed/registered company or professionals.
Is updated nightly on business days

Michael Lewis’s Flash Boys eye opening, fast moving account of High Frequency Trading

Michael Lewis’ Flash Boys is a fast moving eye opener for those of us who do not spend our days working in and around ‘dark money’ pools and the backrooms of Wall Street banks.

The book begins by laying out the major players in the High Frequency Trading (HFT) market place. These players include Wall Street banks, traders, stock exchanges, computer programmers and those that are related to those industries.

Lewis then, through a very fast moving person-focused narrative, describes how HFT techniques have hurt the average investor for many years; mostly without the average investor even knowing that they were injured. He describes how techniques such as stock ‘front-running’ and cross market arbitrage causes the average investor to pay more than they should for the trades that they make, The amount of injury for the average trade is small; but collectively as Lewis describes, the amounts are extremely large and in the billions of dollars.

The real strength of the book is Lewis’ ability to bring HFT practices and the workings of dark money pools (pools of money where untracked and untraceable stock trades occur) to the forefront and up for discussion. However, much more research is needed before determining if HFT and dark money pools are in fact good or bad for the working of the economy. For example, some of the trades such as cross market arbitrage trades which equalize the prices investors pay across different exchanges are arguably good for the working of the stock market and the economy. The same case could be made for trades that equalize prices across different time periods (even though the time periods are ridiculously small).

In any event, Lewis’ book, as usual, has shined a light on a area that was previously unseen or imagined by most of us.

— DDS

Another economic bright spot: People can pay their mortgages as delinquency data shows a drop in late payments

Data released by the credit giant TransUnion indicates that :

The mortgage delinquency rate (the rate of borrowers 60 days or more delinquent on their mortgages) dropped below 4% for the first time since 2008, ending Q4 2013 at 3.85%.

The mortgage delinquency rate declined for the eighth consecutive quarter from 4.09% in Q3 2013 while dropping more than 24% from one year earlier (5.08% in Q4 2012).

The study also found:

Florida, NJ continued to have a higher mortgage delinquency rate at 8.18% and 7.60%
Nevada saw the rate of delinquencies fall by over a third (9.98% to 6.52%)

Recent payday loan research

Adams, William, Liran Einav, and Jonathan Levin. 2009. “Liquidity Constraints
and Imperfect Information in Subprime Lending.” American Economic
Review 99 (1): 49-84.

Agarwal, Sumit, Paige Marta Skiba, and Jeremy Tobacman. 2009. “Payday
Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?”
American Economic Review Papers and Proceedings 99 (2): 412-417.

Bhutta, Neil, Paige Marta Skiba, and Jeremy Tobacman. 2012. “Payday Loan
Choices and Consequences.” Vanderbilt University Law School Working
Paper No.12-20.

Chatterjee, Satyajit, Dean Corbae, Makoto Nakajima, and Jose-Victor Rios-
Rull. 2007. “A Quantitative Theory of Unsecured Consumer Credit with
Risk of Default.” Econometrica 75 (6): 173-234.

Edelberg, Wendy. 2004. “Testing for Adverse Selection and Moral Hazard in
Consumer Loan Markets.” FEDS Working Paper No. 2004-09.

Elliehausen, Gregory, and Edward C. Lawrence. 2001. Payday Advance Credit
in America: An Analysis of Customer Demand. Credit Research Center,
Georgetown University.

Gross, David, and Nicholas S. Souleles. 2002. “Do Liquidity Constraints and
Interest Rates Matter for Consumer Behavior? Evidence from the Credit
Card Data.” Quarterly Journal of Economics 117 (1): 149-185.

Karlan, Dean, and Jonathan Zinman. 2009. “Expanding Credit Access: Using
Randomized Supply Decisions to Estimate the Impacts.” Review of Financial
Studies 23 (1): 433-464.

Melzer, Brian T.. 2011. “The Real Costs of Credit Access: Evidence from the
Payday Lending Market.” Quarterly Journal of Economics 126 (1): 517-
555.

Melzer, Brian T., and Donald P. Morgan. 2010. “Competition and Adverse

Selection in a Consumer Loan Market: The Curious Case of Overdraft vs.
Payday Credit.” Unpublished.

Morse, Adair. 2011. “Payday Lenders: Heroes or Villains?” Journal of Financial

Economics 102 (1): 28-44.

Skiba, Paige Marta, and Jeremy Tobacman. 2011. “Do Payday Loans Cause
Bankruptcy?” Vanderbilt University Law and Economics Research Paper
No. 11-13.

Stephens, Melvin. 2008. “The Consumption Response to Predictable Changes
in Discretionary Income: Evidence from the Repayment of Vehicle
Loans.” Review of Economics and Statistics 90 (2): 241-252.

Economists find that larger payday loans lead to LOWER default rates

Economists, Will Dobbie and Paige Mart Skiba, in their paper, use data from Payday lenders in a number states to estimate an econometric model of the payday loan model. Their paper uses borrower income, demographic information, and loan eligibility details to test for moral hazard and adverse selection in the payday loan market.

They find no evidence of moral hazard. A larger loan actually decreases the probability of a default. They find that a $50 larger payday loan leads to a 17 to 33 percent drop in the probability of default. In addition, their results show the relationship between factors such as credit score (-), home owner ship (-), income (-) and age(-) on the probability of default.

Definition: In economic theory, a moral hazard is a situation where a party will have a tendency to take risks because the costs that could incur will not be felt by the party taking the risk