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Juvenile delinquent mortgages: Bad credit or bad economy?

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  • Haughwout, Andrew
  • Peach, Richard
  • Tracy, Joseph

Abstract

We study early default, defined as serious delinquency or foreclosure in the first year, among nonprime mortgages from the 2001 to 2007 vintages. After documenting a dramatic rise in such defaults and discussing their correlates, we examine two primary explanations: changes in underwriting standards that took place over this period, and changes in the economic environment. We find that while credit standards were important in determining the probability of an early default, changes in the economy--especially a sharp reversal in house price appreciation--after 2004 were the more critical factor in the increases in default rates that we observe. An important additional result is that in spite of our rich set of covariates, much of the increase remains unexplained, even in retrospect. Thus, the fact that the credit markets seemed surprised by the rate of early defaults in the 2006 and 2007 nonprime vintages becomes more understandable.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 64 (2008)
Issue (Month): 2 (September)
Pages: 246-257

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Handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:246-257

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Housing Mortgage default Subprime mortgages Negative equity;

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References

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  1. Ronel Elul, 2006. "Residential mortgage default," Business Review, Federal Reserve Bank of Philadelphia, Federal Reserve Bank of Philadelphia, issue Q3, pages 21-30.
  2. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers, Federal Reserve Bank of Boston 07-15, Federal Reserve Bank of Boston.
  3. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  4. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
  5. Anthony Pennington-Cross & Giang Ho, 2006. "The termination of subprime hybrid and fixed rate mortgages," Working Papers, Federal Reserve Bank of St. Louis 2006-042, Federal Reserve Bank of St. Louis.
  6. Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers, Federal Reserve Bank of St. Louis 2007-05, Federal Reserve Bank of St. Louis.
  7. Karen M. Pence, 2003. "Foreclosing on opportunity: state laws and mortgage credit," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2003-16, Board of Governors of the Federal Reserve System (U.S.).
  8. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 275-308, March.
  9. Kau, James B, et al, 1995. "The Valuation at Origination of Fixed-Rate Mortgages with Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 11(1), pages 5-36, July.
  10. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper, Federal Reserve Bank of Boston 08-3, Federal Reserve Bank of Boston.
  11. Eduardo S. Schwartz & Walter N. Torous, 1993. "Mortgage Prepayment and Default Decisions: A Poisson Regression Approach," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 21(4), pages 431-449.
  12. Christopher J. Mayer & Karen Pence, 2008. "Subprime Mortgages: What, Where, and to Whom?," NBER Working Papers 14083, National Bureau of Economic Research, Inc.
  13. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
  14. Chris Mayer & Karen Pence, 2008. "Subprime mortgages: what, where, and to whom?," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2008-29, Board of Governors of the Federal Reserve System (U.S.).
  15. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
  16. Deng, Yongheng & Gabriel, Stuart, 2006. "Risk-Based Pricing and the Enhancement of Mortgage Credit Availability among Underserved and Higher Credit-Risk Populations," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1431-1460, September.
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