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Business Ethics Matter in the Organization of SocietyDr. Gonzalo Maturana, Assistant Professor of Finance, at Goizueta Business School, Emory University, suggests that society must be organized around an economic system that places competition as the fundamental pillar for economic growth. And, that we can easily lose the benefits of capitalism when rules are violated.An organized society formulated around an economic system that places competition as the competition for economic growth awards merit. The idea is that if one works hard there is an award. This fosters innovation and entrepreneurship, resulting in benefits to society, the entrepreneur hires workers, lower prices and covers a necessity. Central to the idea of merit is fairness. The strength of our economic system is predicated around this idea that the system is fair. There are a set of rules and polices that we have to help us move closer to fairness, but if not followed the system falls apart and a small group of people benefit at the expense of the majority. As a result, we could lose the benefits of capitalism when rules are violated.So now the question is what happens if the public perceives that the system is not fair. A University of Chicago professor argues that without public support, or worse with public resentment, it's very difficult for the economic and financial system to operate.Housing Crisis and Mortgage Back SecuritiesThe 2008 mortgage crisis revealed the negative impact of not following ethics and behaving fairly. Recession mortgage backed securities helped facilitate additional mortgage credit that was not available. This fueled the demand for houses and contributed to the housing bubble. The market grew rapidly around 85 billion in 2000 to 1 trillion in 2006. Catching these during an economic boom is very difficult in part because no one is paying attention and the problem is exacerbated during an economic downturn. Mortgaged back securities are non-agency securities. The mortgages are put together and securities are created out of them which is then sold to investors. This allows banks to transfer credit risks allowing borrowers to default on their mortgages. Homeowners may want larger loans and a lower rate and the loan officer collects important information to determine how risky the borrower is.There are several conflicts of interest when creating such securities. The loan officer is often compensated on loan volume, so there is some incentive to lowering the standards. Originators may also have an incentive to inaccurately report information to the underwriters. Misrepresentation may be difficult to catch due to the complexity of mortgage back securities, the structure of the payments and how you measure risk. Most problems flow directly or indirectly to the incentive of the underwriting bank. Residential mortgage backed securities are extremely complex in terms of the structure of the payments and how you measure risk. Also, credit rating agencies were supposed to certify the quality of the securities, but again they were paid by the underwriters with whom they have repeated business. Dr. Maturana has research that shows that there was a ripple effect that operated house prices and incentivized someone’s decision to expand a credit. When the recession market collapsed and disappeared by these lenders went out of business quickly. Ramifications for Unethical BehaviorDr. Maturana says employees involved in the creation of residential mortgage backed securities that were later found to be misrepresented did not face significant career penalties. These employees remained employed at the same bank, moved to another large bank, or were promoted. This is concerning because the employees that were analyzed, worked at banks that settled with the Department of Justice and admitted wrongdoing during the structuring of these residential mortgage backed securities. Findings show that the system of settlements may not be good. These results and the lack of individual prosecutions send a message to current and future finance professionals that there's little if any place for punishment for abusive practices. This level of repercussion can reinforce cultural norms that allow or encourage employees to ignore the warning signs of fraud and abuse. Dr. Maturana says good business ethics need to be part of the culture and that the guidelines need to come from upper management who should lead by example. If a boss cares about business ethics and good behavior then that's something that's constantly discussed in the work setting. Also, for incentivizing good behavior he suggests having a strong enough deterrent. Increasing accountability and rethinking statute of limitations for example are a way to generate incentives. How Academia Plays a Role in Business EthicsConflicts of interest are driving business decisions all the time. Dr. Maturana says business schools can contribute to business ethical behavior by discussing these issues openly in the classroom and increasing awareness of the importance of these issues beyond just the fact that misbehaving is wrong. Academia can play a role in exposing and challenging unethical businesses practices.

Poor Ethics, Bad Business

Welcome to Emory University’s Goizueta Business School. Our goal is to make a positive impact on society by developing future leaders through our suite of undergraduate, MBA, and PhD degree programs, and our tailored non-degree courses; and by creating and disseminating impactful knowledge and insights.

Emory University, Goizueta Business School

Gonzalo Maturana joined the Goizueta Business School in 2015 after completing his PhD in Finance at The University of Texas at Austin McCombs School of Business. 

Professor Maturana’s primary research focuses are in corporate finance, household finance, real estate finance, and conflicts of interest. His research has been published in leading academic journals and has also appeared in nonacademic outlets such as Bloomberg, MarketWatch, and the CFA digest. Among his research awards are the Michael J. Brennan Award for best paper in the Review of Financial Studies in 2017 and the Rising Scholar Award for best paper by a young researcher in the Review of Financial Studies in 2020.

Prior to joining the faculty at Goizueta, Professor Maturana held positions at the University of Chile and IM Trust, a Chilean investment bank. At Goizueta, he has taught Corporate Finance, Financial Services, and Applied Methods in Corporate Finance.

Corporate Finance

Household Finance

Securitization

Real Estate

Conflicts of Interest

Personal Website

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Gonzalo Maturana

After the collapse of the housing market, the wave of foreclosures in the US changed the economic landscape of many neighborhoods across the country. Some academics and policymakers have argued that the renegotiation of those loans was a much better alternative than foreclosure and that incentives should have been offered to financial institutions to encourage it. However, little research exists to understand the performance of loans that were modified. Gonzalo Maturana, assistant professor of finance, takes a close look at loan modifications made early in the recent housing crisis to better understand the value of offering incentives to modify securitized non-agency loans. According to Maturana, researchers contend that the small number of loan modifications added to the number of foreclosures during the subprime crisis. His analysis consisted of slightly more than 835,000 non-agency securitized loans that became delinquent between August 2007 and February 2009. Maturana found that loan “modification reduces loan losses by 35.8% relative to the average loss, which suggests that the marginal benefit of modification likely exceeded the marginal cost.” Additionally, modifications resulted in fewer liquidations. He also found that modifications were particularly useful “in preventing future loan losses in times of large increases in delinquencies when servicers are more likely to be working at full capacity.”

Securitized loan modification and loan performance

This paper examines apparent fraud among securitized nonagency loans using three indicators: unreported second liens, owner occupancy misreporting, and appraisal overstatements.

Who facilitated misreporting in securitized loans? 

Nonagency mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) derived from MBSs and their role in the recent financial and housing crisis remain a subject of discussion. An MBS is an asset-backed security secured by a mortgage or grouping of mortgages. Non-agency MBSs are not guaranteed by any government-sponsored organization, such as Freddie Mac or Fannie Mae, or the federal government. According to research from Gonzalo Maturana, assistant professor of finance, and John Grifﬁn (U of Texas), the complexity of these structured products made it difficult to learn the true value of the underlying assets. They analyzed “apparent fraud among securitized nonagency loans, looking at unreported second liens, owner occupancy misreporting, and appraisal overstatements.” The study data comes from Lewtan’s ABSNet Loan and HomeVal data sets, along with DataQuick’s Assessor and History files, for the time period between January 2002 and December 2011. The researchers discovered that “48% of loans exhibited at least one indicator of misrepresentation.” The level of misreporting was similar for low- and full-documentation loans. Also, loans with a misreporting were 51% more likely to be delinquent. Maturana and Griffin’s research points to apparent fraud by loan originators and MBS underwriters, and it also suggest that MBS underwriting banks were aware of some of the MBS representations at issuance.

Misreporting in securitized loans

A new study argues that housing prices were more inflated—and the crash even more violent—in markets where lenders who misreported mortgages held concentrated market shares.

Gonzalo Maturana, assistant professor of finance, and coauthor John M. Griffin (U of Texas) argue that securitization was not the only factor in the recent housing crisis. Their new research indicates that questionable mortgage origination practices played a significant role in the distortions in the 2003 to 2012 real estate boom and bust. Specifically, the underreporting of the true risk profiles of borrowers, including the misreporting of second-liens, helped to drive housing demand and, ultimately, contributed to the crisis. They note, “The process of underreporting key loan attributes can have the by-product of facilitating credit to borrowers who have little ability to repay.” The researchers tested their theory by using county deed records, securitized loan information, house price statistics, and home loan application data from a number of reliable sources to detail the 2003 to 2006 run-up of housing prices and its subsequent 2007 to 2012 collapse. After controlling for securitization, they determined that “originator malfeasance” in certain areas also served to raise the credit supply. Maturana and Griffin concluded that dubious originator practices helped to cause house prices in certain zip codes to increase relative to other areas and eventually led to larger price crashes.

Dubious loan origination and the housing collapse

When you change your perspective you can change business for the better. Join us on Goizueta Effect to hear from leading faculty at the Goizueta Business School on the latest trends, research, and innovations in business, and find out how you can achieve more, do more, and create more in today’s ever-changing marketplace.

Goizueta Effect

it-works-on-tv-do-property-rehabs-drive-up-prices-in-surrounding-neighborhoods

Associate Professor of Finance

Assistant Professor of Finance

Banking

Credit Risk

When a house is distressed, the negative impact tends to ricochet around its surrounding neighborhood. Distressed homes (e.g. foreclosures) can significantly bring down the value of other homes in the area, as these properties are often poorly maintained and then typically sold at discounted prices

 In the past, and particularly in the wake of the 2008 subprime crisis, federal and local governments sought to mitigate this negative effect by incentivizing the rehabilitation of distressed properties through programs like the Neighborhood Stabilization Program (NSP). Until now, there has been some skepticism as to whether or not these kinds of initiatives actually work.

New research by Goizueta Foundation Term Associate Professor of Finance Gonzalo Maturana and Goizueta’s Assistant Professor of Finance Rohan Ganduri might change the narrative definitively. They have analyzed new data that shows that rehabilitation projects not only help to stabilize housing prices in affected neighborhoods but can also actually increase the value of neighboring properties by as much as four percentage points.

 Using highly robust, non-parametric statistical analysis methods, Maturana and Ganduri parsed more than 10 years of information on rehabilitated property transactions and real estate prices across the United States. The effect of renovating dilapidated or derelict houses in these areas pushes prices up between 2.3 and four percentage points in their surrounding blocks, they find. And that’s not all.

While the average amount spent by authorities on these renovations comes in at roughly $36,000, their study estimates a societal welfare gain of $134,000 per rehabilitated property—almost four times the cost of the rehabilitation. These insights should provide interesting food for thought for the U.S. Congress and local governments, Maturana notes.  After the housing crash in 2008, Congress allocated $6.9 billion in funding to the NSP to help stabilize communities affected by high vacancy and foreclosure rates, but the Department of Housing and Urban Development didn’t find any positive impact on local housing markets at the time.
 “Our findings suggest that rehabilitation projects do drive a positive uptick in prices that can help revitalize distressed neighborhoods,” says Maturana. “And they provide very timely support for policy interventions, such as President Biden’s infrastructure spending program which proposes an allocation of $20 billion to rehabilitate 500,000 single-family homes in low-income neighborhoods in the United States.”  With the current economy facing some uncertain times - this is a topic that is important for everyone.  And if you're a reporter looking to know more then let us help.

 Gonzalo Maturana is an associate professor of finance at the Goizueta Business School. He is an expert in the areas of corporate, household and real estate finance.

Rohan Ganduri's research interests include banking, credit risk, real estate, household finance, and corporate finance.

  
Both Gonzalo and Rohan are available to speak to media regarding this topic – simply click on either icon now to arrange an interview today.




It Works on TV - Do Property Rehabs Drive Up Prices in Surrounding Neighborhoods?

want-to-save-on-home-loans-just-talk-to-your-peers

For most of us, finance is complex. Yet making financial decisions is part of day-to-day life.

Take mortgages. Around 60 percent of U.S. households have a home mortgage, but how many actually understand its real value? Calculating things like interest rate trade-offs or closing costs is not easy, and research finds that a majority of families make financial mistakes because they fail to understand benefits or savings that might be open to them in refinancing.

There are ways to overcome this kind of “information friction”—the obstacles to understanding that make it hard for people to process complex financial ideas and concepts. One of these is education. Ensuring that people have direct access to clear information can help inform household decisions. That seems pretty basic.
Another, perhaps less understood, mechanism is the “peer effect”—the way we learn from and are influenced by what our peers or colleagues say or do.

 A new paper published in the Review of Financial Studies by Gonzalo Maturana, associate professor of finance, takes a fresh look at how the peer effect can help households make better decisions about their mortgages. And he finds that work colleagues and associates can actually have a far greater positive impact on our financial outcomes than we might expect.

Together with Jordan Nickerson from MIT’s Sloan School of Management, Maturana ran a large-scale study of a particular U.S. peer group: public school teachers employed by the state of Texas.

Here’s what the study found: Where there was a lot of mortgage refinancing going on among teachers in a particular school, individuals were a stunning 20.7 percent more likely to refinance their own mortgage. In other words, they were far more disposed to investigate alternatives and take advantage of the better deals on offer. The peer effect was also a critical factor in their subsequent choice of mortgage lender.

Maturana and Nickerson also found that the more savings a particular peer group was making in mortgage repayments, the more refinancing activity there was in that school or teacher network.

It is clear. With financial decisions, the network effect can create a positive feedback loop, said Maturana.

 Household finance and mortgages are top of mind and play a part in most American families – and if you are a journalist looking to cover this topic – then let our experts help.

Gonzalo Maturana is an Associate Professor of Finance at the Goizueta Business School. He is an expert in the areas of corporate, household and real estate finance. Gonzalo is available to speak to media regarding this topic – simply click on his icon now to arrange an interview today.



Want to save on home loans? Just talk to your peers!

dubious-loan-origination-and-the-housing-collapse

Gonzalo Maturana, assistant professor of finance, and coauthor John M. Griffin (U of Texas) argue that securitization was not the only factor in the recent housing crisis. Their new research indicates that questionable mortgage origination practices played a significant role in the distortions in the 2003 to 2012 real estate boom and bust. Specifically, the underreporting of the true risk profiles of borrowers, including the misreporting of second-liens, helped to drive housing demand and, ultimately, contributed to the crisis. They note, “The process of underreporting key loan attributes can have the by-product of facilitating credit to borrowers who have little ability to repay.” The researchers tested their theory by using county deed records, securitized loan information, house price statistics, and home loan application data from a number of reliable sources to detail the 2003 to 2006 run-up of housing prices and its subsequent 2007 to 2012 collapse. After controlling for securitization, they determined that “originator malfeasance” in certain areas also served to raise the credit supply. Maturana and Griffin concluded that dubious originator practices helped to cause house prices in certain zip codes to increase relative to other areas and eventually led to larger price crashes.

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