The Journal of Finance

Borrower Misreporting and Loan Performance

Published: 03/27/2014   |   DOI: 10.1111/jofi.12156

MARK J. GARMAISE

Borrower misreporting is associated with seriously adverse loan outcomes. Significantly more residential mortgage borrowers reported personal assets just above round number thresholds than just below. Borrowers who reported above‐threshold assets were almost 25 percentage points more likely to become delinquent (mean delinquency was 20%). For applicants with unverified assets, the increase in delinquency was greater than 40 percentage points. Misreporting was most frequent in areas with low financial literacy or social capital. Incorporating behavioral cues such as threshold effects into a risk assessment model improves its ability to uncover delinquencies, though at a cost of mischaracterizing some safe loans.

Consumer Default, Credit Reporting, and Borrowing Constraints

Published: 05/15/2017   |   DOI: 10.1111/jofi.12522

MARK J. GARMAISE, GABRIEL NATIVIDAD

Why do negative credit events lead to long‐term borrowing constraints? Exploiting banking regulations in Peru and utilizing currency movements, we show that consumers who face a credit rating downgrade due to bad luck experience a three‐year reduction in financing. Consumers respond to the shock by paying down their most troubled loans, but nonetheless end up more likely to exit the credit market. For a set of borrowers who experience severe delinquency, we find that the associated credit reporting downgrade itself accounts for 25% to 65% of their observed decline in borrowing at various horizons over the following several years.

Catastrophic Risk and Credit Markets

Published: 03/13/2009   |   DOI: 10.1111/j.1540-6261.2009.01446.x

MARK J. GARMAISE, TOBIAS J. MOSKOWITZ

We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe‐susceptible properties. Using unique micro‐level data, we find that earthquake risk decreased commercial real estate bank loan provision by 22% in California properties in the 1990s, with more severe effects in African–American neighborhoods. We show that the 1994 Northridge earthquake had only a short‐term disruptive effect. Our basic findings are confirmed for hurricane risk, and our model and empirical work have implications for terrorism and political perils.

Cheap Credit, Lending Operations, and International Politics: The Case of Global Microfinance

Published: 03/19/2013   |   DOI: 10.1111/jofi.12045

MARK J. GARMAISE, GABRIEL NATIVIDAD

The provision of subsidized credit to financial institutions is an important and frequently used policy tool of governments and central banks. To assess its effectiveness, we exploit changes in international bilateral political relationships that generate shocks to the cost of financing for microfinance institutions (MFIs). MFIs that experience politically driven reductions in total borrowing costs hire more staff and increase administrative expenses. Cheap credit leads to greater profitability for MFIs and promotes a shift toward noncommercial loans but has no effect on total overall lending. Instead, the additional resources are either directed to promoting future growth or dissipated.

Bank Mergers and Crime: The Real and Social Effects of Credit Market Competition

Published: 03/09/2006   |   DOI: 10.1111/j.1540-6261.2006.00847.x

MARK J. GARMAISE, TOBIAS J. MOSKOWITZ

Using a unique sample of commercial loans and mergers between large banks, we provide micro‐level (within‐county) evidence linking credit conditions to economic development and find a spillover effect on crime. Neighborhoods that experience more bank mergers are subject to higher interest rates, diminished local construction, lower prices, an influx of poorer households, and higher property crime in subsequent years. The elasticity of property crime with respect to merger‐induced banking concentration is 0.18. We show that these results are not likely due to reverse causation, and confirm the central findings using state branching deregulation to instrument for bank competition.

Spending Less after (Seemingly) Bad News

Published: 04/29/2024   |   DOI: 10.1111/jofi.13325

MARK J. GARMAISE, YARON LEVI, HANNO LUSTIG

Using high‐frequency spending data, we show that household consumption displays excess sensitivity to salient macroeconomic news, even when the news is not real. When the announced local unemployment rate reaches a 12‐month maximum, local news coverage of unemployment increases and local consumers reduce their discretionary spending by 1.5% relative to consumers in areas with the same macroeconomic conditions. Low‐income households display greater excess sensitivity to salience. The decrease in spending is not later reversed. Households in treated areas act as if they are more financially constrained than those in untreated areas with the same fundamentals.