The Journal of Structured Finance

The Impact of Higher Mortgage Rates on the Housing and Mortgage Markets

Laurie S. Goodman, Michael Neal, Daniel Pang — Thu, 18 May 2023 00:00:00 -0700

Mortgage rates are up considerably as the Federal Reserve is tightening monetary policy. We find that historically, while higher rates challenge affordability, higher rates are also associated with periods of stronger economic growth, low unemployment and higher inflation. These latter effects have historically outweighed the affordability effect and home prices have generally risen during periods of increasing interest rates. Periods of rapidly rising interest rates have been accompanied by a sharp deceleration in albeit still positive, home price appreciation (HPA). Despite still solid labor market conditions, affordability is even more challenged now than it was just prior to the Great Financial Crisis. However, the acute housing supply shortage should provide HPA a cushion. We also show that higher rates will reshape the housing and mortgage markets—rate/term refinances are largely choked off, cash-out refinances are likely to continue at much lower levels, and purchase activity will be lower, as there will be fewer buyers and sellers. Mortgage gross issuance will be down considerably. But higher rates will also lead to the expansion of the second lien market.

PROJECT FINANCE FOR GREEN RENEWABLE ASSETS

Vikas Srivastava — Thu, 18 May 2023 00:00:00 -0700

India is taking steps to decarbonize its economy and has set a target of building 450 GW of renewable energy capacity by 2030. Project finance has a critical role to play in enabling this transition to a carbon resilient economy. The opportunity has attracted diversified institutional investors, but has not resulted in a lower project cost of capital. To address this, the paper presents a qualitative risk assessment model. The results show that risk drivers like high debt ratios, technology disruptions and inherent information asymmetry in the contractual bundle that plagued thermal power financing still remain unaddressed. This needs a rethink on how project finance is applied. The author gives three suggestions: First, the debt ratios need to be optimised by sculpting it against cash flows; Second, the projects need the discipline of global capital markets and institutions over the life cycle. And third, the financial institutions need to actively incorporate climate risk into their internal rating models to price credit risk.

MDBs Loans: A New Asset Class for on and off Balance Sheet Collateralized Loan Obligations (CLOs)

Mahesh A. Kotecha — Thu, 18 May 2023 00:00:00 -0700

Abstract

Balance sheet management by multilateral development banks (MDBs) with structured financings is in its infancy but path-breaking deals by the African Development Bank (AfDB) and International Finance Corporation (IFC) show the way. Three MDB transactions are presented herein, involving about $13 billion in public and private sector MDB loans. Both of the AfDB deals totaling $3 billion are synthetic where the loans remain on the MDB’s balance sheet despite substantial risk transfers. The IFC transaction allows co-funding of private sector loans on a pari passu basis with other lenders with only the IFC-funded portion on its balance sheet.

Securitizations with MDB loans sales are more difficult as borrowers accord preferred creditor status to MDBs, which could be reduced if not voided altogether by loan sales.

A robust MDB loan CLO market would require: (i) disclosure of MDBs’ historical project loan performance collected and retained in the proprietary Global Emerging Markets (GEMS) database; (ii) more transparent rating agency capital relief criteria for MDB securitizations, and (iii) greater management, investor, banker and MDB attention to this asset class.

A Fundamental Framework for Identification of Profitable Cryptocurrencies

Dimple Bhojwani, Samik Shome — Thu, 18 May 2023 00:00:00 -0700

Major academic researches related to cryptocurrencies are developed by technologists who mainly focus on its feasibility and security. The researchers in the area of economics and finance also so far have provided limited insights in guiding investors for profiting from cryptocurrencies. This study proposes a framework that depicts how rational investing can be aided with the help of historical information published by cryptocurrency projects. Trading strategies based on the fundamentals can generate economically significant gains relative to the buy-and-hold position.