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Loss given default of high loan-to-value residential mortgages

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  • Qi, Min
  • Yang, Xiaolong
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    Abstract

    This paper studies loss given default using a large set of historical loan-level default and recovery data of high loan-to-value residential mortgages from several private mortgage insurance companies. We show that loss given default can largely be explained by various characteristics associated with the loan, the underlying property, and the default, foreclosure, and settlement process. We find that the current loan-to-value ratio is the single most important determinant. More importantly, mortgage loss severity in distressed housing markets is significantly higher than under normal housing market conditions. These findings have important policy implications for several key issues in Basel II implementation.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 33 (2009)
    Issue (Month): 5 (May)
    Pages: 788-799

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    Handle: RePEc:eee:jbfina:v:33:y:2009:i:5:p:788-799

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Loss given default Residential mortgage Default Recovery Downturn Basel II;

    References

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    1. Anthony Pennington-Cross, 2010. "The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 109-129, February.
    2. Vassilis Lekkas & John M. Quigley & Robert Order, 1993. "Loan Loss Severity and Optimal Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 353-371.
    3. Calem, Paul S. & LaCour-Little, Michael, 2004. "Risk-based capital requirements for mortgage loans," Journal of Banking & Finance, Elsevier, vol. 28(3), pages 647-672, March.
    4. Ambrose, Brent W & Buttimer, Richard J, Jr & Capone, Charles A, 1997. "Pricing Mortgage Default and Foreclosure Delay," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 314-25, August.
    5. Clauretie, Terrence M & Herzog, Thomas N, 1990. "The Effect of State Foreclosure Laws on Loan Losses: Evidence from the Mortgage Insurance Industry," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(2), pages 221-33, May.
    6. Nystrom, Kaj & Skoglund, Jimmy, 2006. "A credit risk model for large dimensional portfolios with application to economic capital," Journal of Banking & Finance, Elsevier, vol. 30(8), pages 2163-2197, August.
    7. VanHoose, David, 2007. "Theories of bank behavior under capital regulation," Journal of Banking & Finance, Elsevier, vol. 31(12), pages 3680-3697, December.
    8. Gordon W. Crawford & Eric Rosenblatt, 1995. "Efficient Mortgage Default Option Exercise: Evidence from Loss Severity," Journal of Real Estate Research, American Real Estate Society, vol. 10(5), pages 543-556.
    9. Dermine, J. & de Carvalho, C. Neto, 2006. "Bank loan losses-given-default: A case study," Journal of Banking & Finance, Elsevier, vol. 30(4), pages 1219-1243, April.
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    Citations

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    Cited by:
    1. Qi, Min & Zhao, Xinlei, 2011. "Comparison of modeling methods for Loss Given Default," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2842-2855, November.
    2. Bastos, João A., 2010. "Forecasting bank loans loss-given-default," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2510-2517, October.
    3. Ebrahim, M. Shahid & Shackleton, Mark B. & Wojakowski, Rafal M., 2011. "Participating mortgages and the efficiency of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3042-3054, November.
    4. Daniel Roesch & Harald Scheule, 2011. "Securitization Rating Performance and Agency Incentives," Working Papers 182011, Hong Kong Institute for Monetary Research.
    5. Sampagnaro, Gabriele & Battaglia, Francesca, 2010. "Reliability and Heterogeneity of Real Estate Indexes and their Impact on the Predictability of Returns," MPRA Paper 23378, University Library of Munich, Germany.
    6. Daniel Rosch & Harald Scheule, 2009. "The Empirical Relation between Credit Quality, Recovery, and Correlation," Working Papers 222009, Hong Kong Institute for Monetary Research.
    7. Bank for International Settlements, 2011. "Portfolio and risk management for central banks and sovereign wealth funds," BIS Papers, Bank for International Settlements, number 58, March.
    8. Rösch, Daniel & Scheule, Harald, 2009. "The Empirical Relation between Credit Quality, Recovery and Correlation," Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Leibniz Universität Hannover dp-418, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    9. Daniel Rösch & Harald Scheule, 2011. "Securitization rating performance and agency incentives," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 287-314 Bank for International Settlements.
    10. Joseph Tracy & Joshua Wright, 2012. "Payment changes and default risk: theimpact of refinancing on expected credit losses," Staff Reports 562, Federal Reserve Bank of New York.
    11. Grant, Charles, 2010. "Evidence on the insurance effect of bankruptcy exemptions," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2247-2254, September.

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