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Subprime mortgage default

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Author Info

  • Kau, James B.
  • Keenan, Donald C.
  • Lyubimov, Constantine
  • Carlos Slawson, V.
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    Abstract

    This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime crisis. Given the estimated model, contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination. It is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance, a change which can be first detected in late 2004. On the other hand, the evidence also indicates that the secondary mortgage market became aware of this change at about this same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0094119011000313
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    Bibliographic Info

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

    Volume (Year): 70 (2011)
    Issue (Month): 2 ()
    Pages: 75-87

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    Handle: RePEc:eee:juecon:v:70:y:2011:i:2:p:75-87

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

    Related research

    Keywords: Mortgage default; House price shocks;

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    Cited by:
    1. Mundra, Kusum, 2013. "Minority and Immigrant Homeownership Experience: Evidence from the 2009 American Housing Survey," IZA Discussion Papers 7131, Institute for the Study of Labor (IZA).

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