IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0725.html
   My bibliography  Save this paper

Savings and Loan Usage of the Authority to Invest in Corporate Debt

Author

Listed:
  • Patric H. Hendershott
  • Kevin E. Villani

Abstract

This paper examines the portfolio choice of savings and loan associations (SLAS) between mortgages and bonds, first in a certainty world and then under uncertainty. Differences in servicing and transactions costs, in default losses, in tax treatment and in the timing of payments are accounted for in a certain world. SLAs are seen as investing in bonds only if the demand for mortgage funds is sufficiently weak that more profitable SLAs compete away some of the value of their tax preference by bidding down mortgage rates; in this case less profitable SLAs would find corporate debt attractive. In an uncertain world, mortgages will command a premium over bonds to compensate for the prepayment option extended mortgage borrowers. The appropriate value of this premium depends on uncertainty regarding future interest rates and aversion to this uncertainty. SLAs that view future interest rates as more uncertain than the market does generally, or who are more averse to this uncertainty, will require an options premium greater than that determined in the market. Thus they will find corporate debt to be attractive relative to bonds, even when the demand for mortgage funds is strong and their mortgage tax preference is not competed away.

Suggested Citation

  • Patric H. Hendershott & Kevin E. Villani, 1981. "Savings and Loan Usage of the Authority to Invest in Corporate Debt," NBER Working Papers 0725, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0725
    Note: ME
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0725.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Patric H. Hendershott & Kevin E. Villani, 1981. "Housing Finance in the United States in the Year 2001," NBER Working Papers 0739, National Bureau of Economic Research, Inc.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0725. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.