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Optimal Stopping and Losses on Subprime Mortgages

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  • Dennis Capozza

    ()

  • Thomas Thomson

Abstract

Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and collateral characteristics, and local legal requirements, as well as traditional option variables in the decisions of borrowers and lenders. Although subprime borrowers default earlier, which should reduce lender losses, these borrowers, nevertheless, impose greater realized losses on mortgage lenders. Copyright Springer Science + Business Media, Inc. 2004

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File URL: http://hdl.handle.net/10.1007/s11146-004-4875-z
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Bibliographic Info

Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 30 (2004)
Issue (Month): 2 (November)
Pages: 115-131

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Handle: RePEc:kap:jrefec:v:30:y:2004:i:2:p:115-131

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Web page: http://www.springerlink.com/link.asp?id=102945

Related research

Keywords: subprime; mortgages; defaults; losses; lending;

References

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  1. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1997. "Mortgage Default in Local Markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(4), pages 631-655.
  2. 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.
  3. 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, Blackwell Publishing, vol. 29(3), pages 314-25, August.
  4. Jones, Lawrence D, 1993. "Deficiency Judgments and the Exercise of the Default Option in Home Mortgage Loans," Journal of Law and Economics, University of Chicago Press, vol. 36(1), pages 115-38, April.
  5. 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.
  6. Dennis R. Capozza & Dick Kazarian & Thomas A. Thomson, 1998. "The Conditional Probability of Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 259-289.
  7. Gordon W. Crawford & Eric Rosenblatt, 1995. "Efficient Mortgage Default Option Exercise: Evidence from Loss Severity," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 10(5), pages 543-556.
  8. Ambrose, Brent W & Capone, Charles A, Jr & Deng, Yongheng, 2001. "Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 23(2), pages 213-34, September.
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Citations

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Cited by:
  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, Springer, vol. 40(2), pages 109-129, February.
  2. Dennis Capozza & Thomas Thomson, 2006. "Subprime Transitions: Lingering or Malingering in Default?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 33(3), pages 241-258, November.
  3. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
  4. W. Scott Frame & Lawrence J. White, 2009. "Technological change, financial innovation, and diffusion in banking," Working Paper, Federal Reserve Bank of Atlanta 2009-10, Federal Reserve Bank of Atlanta.
  5. Danis, Michelle A. & Pennington-Cross, Anthony, 2008. "The delinquency of subprime mortgages," Journal of Economics and Business, Elsevier, Elsevier, vol. 60(1-2), pages 67-90.

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