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Estimation of Mortgage Defaults Using Disaggregate Loan History Data

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  • Kerry D. Vandell
  • Thomas Thibodeau

Abstract

This paper addresses, theoretically and empirically, the structure of influences affecting the default option in mortgage contracts. A formal theoretical model recognizes that a number of loan and non-loan related effects beyond equity in the unit could influence the default decision. These include 1) payment levels relative to income, which could displace other investment opportunities or cause a need for borrowing or sale to meet mortgage obligations; 2) current and expected neighborhood and housing market conditions, in particular the expected relative rate of appreciation of the unit and the relative cost of homeownership; 3) economic conditions; 4) wealth; 5) borrower characteristics proxying for variability in income or "crisis" events; as well as 6) transactions costs incurred upon default. Estimates of the model making use of a micro-level sample of individual loan histories over a twelve year period, supplemented by longitudinal census and economic information, find a number of these "other" effects important. Simulations find several of them to dominate the equity effect on default and to help explain why some households with zero or negative equity may not default, while others with positive equity may. The implications of these results for appropriate specification of the pricing model describing the default option and for appropriate underwriting of AMIs are noted. Copyright American Real Estate and Urban Economics Association.

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Bibliographic Info

Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 13 (1985)
Issue (Month): 3 ()
Pages: 292-316

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Handle: RePEc:bla:reesec:v:13:y:1985:i:3:p:292-316

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Citations

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Cited by:
  1. Diaz-Serrano, Luis, 2005. "Income volatility and residential mortgage delinquency across the EU," Journal of Housing Economics, Elsevier, vol. 14(3), pages 153-177, September.
  2. Patric H. Hendershott & William R. Schultz, 1993. "Equity and Nonequity Determinants of FHA Single-Family Mortgage Foreclosures in the 1980s," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 405-430.
  3. Raven Molloy & Hui Shan, 2011. "The post-foreclosure experience of U.S. households," Finance and Economics Discussion Series 2011-32, Board of Governors of the Federal Reserve System (U.S.).
  4. Luci Ellis, 2008. "The housing meltdown: Why did it happen in the United States?," BIS Working Papers 259, Bank for International Settlements.
  5. Lin, Che-Chun & Prather, Larry J. & Chu, Ting-Heng & Tsay, Jing-Tang, 2013. "Differential default risk among traditional and non-traditional mortgage products and capital adequacy standards," International Review of Financial Analysis, Elsevier, vol. 27(C), pages 115-122.
  6. Seow Ong & Poh Neo & Yong Tu, 2008. "Foreclosure Sales: The Effects of Price Expectations, Volatility and Equity Losses," The Journal of Real Estate Finance and Economics, Springer, vol. 36(3), pages 265-287, April.
  7. Arindam Bandyopadhyay & Asish Saha, 2011. "Distinctive demand and risk characteristics of residential housing loan market in India," Journal of Economic Studies, Emerald Group Publishing, vol. 38(6), pages 703-724, November.
  8. Diaz-Serrano, Luis, 2004. "Income Volatility and Residential Mortgage Delinquency: Evidence from 12 EU Countries," IZA Discussion Papers 1396, Institute for the Study of Labor (IZA).
  9. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Unemployment, negative equity, and strategic default," Working Paper 2013-04, Federal Reserve Bank of Atlanta.
  10. Allen Blackman & Alan Krupnick, 2001. "Location-Efficient Mortgages: Is the Rationale Sound?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 20(4), pages 633-649.
  11. Danny Ben-Shahar, 2006. "Screening Mortgage Default Risk: A Unified Theoretical Framework," Journal of Real Estate Research, American Real Estate Society, vol. 28(3), pages 215-240.
  12. George H. Lentz & Ko Wang, 1998. "Residential Appraisal and the Lending Process: A Survey of Issues," Journal of Real Estate Research, American Real Estate Society, vol. 15(1), pages 11-40.
  13. Luci Ellis, 2008. "How many in negative equity? The role of mortgage contract characteristics," BIS Quarterly Review, Bank for International Settlements, December.
  14. Rodrigo Alfaro & Natalia Gallardo & Roberto Stein, 2010. "The Determinants of Household Debt Defa," Working Papers Central Bank of Chile 574, Central Bank of Chile.
  15. Richard Anderson & James VanderHoff, 1999. "Mortgage Default Rates and Borrower Race," Journal of Real Estate Research, American Real Estate Society, vol. 18(2), pages 279-290.
  16. Cheng, Ping & Lin, Zhenguo & Liu, Yingchun, 2010. "Illiquidity, transaction cost, and optimal holding period for real estate: Theory and application," Journal of Housing Economics, Elsevier, vol. 19(2), pages 109-118, June.
  17. Seow Ong & Tien Sing & Alan Teo, 2007. "Delinquency and Default in Arms: The Effects of Protected Equity and Loss Aversion," The Journal of Real Estate Finance and Economics, Springer, vol. 35(3), pages 253-280, October.
  18. Tyler Yang & Che-Chun Lin & Man Cho, 2011. "Collateral Risk in Residential Mortgage Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 42(2), pages 115-142, February.

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