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Subprime Transitions: Lingering or Malingering in Default?

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  • Dennis Capozza

    ()

  • Thomas Thomson

    ()

Abstract

When a mortgage borrower becomes seriously delinquent (i.e., defaults), the lender initiates a time consuming and complex recovery process that may or may not result in foreclosure and eventual disposition of the real estate collateral (REO). This research studies this transition process for a unique sample of subprime mortgages that were seriously delinquent on September 30, 2001. Eight months later, possible states for the delinquent loans, in order, are 1)to remain delinquent without deteriorating further, 2) foreclosure, 3) worsen, i.e., become more months delinquent, 4) bankruptcy and 5) cure. The data indicate that, relative to prime loans, when subprime loans become seriously delinquent (90 days or longer) they are about twice as likely to become REO but take about four times longer to get there. It is unusual for a subprime default to be cured suggesting considerable forbearance by subprime lenders. We explore determinants of the transition probabilities and find that the most economically important predictors of transition from default to any other state are the number of payments the borrower has made and the loan to value ratio. Copyright Springer Science + Business Media, LLC 2006

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File URL: http://hdl.handle.net/10.1007/s11146-006-9984-4
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Bibliographic Info

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

Volume (Year): 33 (2006)
Issue (Month): 3 (November)
Pages: 241-258

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Handle: RePEc:kap:jrefec:v:33:y:2006:i:3:p:241-258

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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. Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
  2. James B. Kau & Taewon Kim, 1994. "Waiting to Default: The Value of Delay," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 539-551.
  3. Dennis Capozza & Thomas Thomson, 2004. "Optimal Stopping and Losses on Subprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 30(2), pages 115-131, November.
  4. Richard A. Phillips & James H. VanderHoff, 2004. "The Conditional Probability of Foreclosure: An Empirical Analysis of Conventional Mortgage Loan Defaults," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(4), pages 571-587, December.
  5. 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.
  6. Pennington-Cross, Anthony, 2003. "Credit History and the Performance of Prime and Nonprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 27(3), pages 279-301, November.
  7. Brent W. Ambrose & Charles A. Capone, 1998. "Modeling the Conditional Probability of Foreclosure in the Context of Single-Family Mortgage Default Resolutions," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(3), pages 391-429.
  8. James F. Epperson & James B. Kau & Donald C. Keenan & Walter J. Muller, 1985. "Pricing Default Risk in Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 261-272.
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Citations

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Cited by:
  1. deRitis, Cristian & Kuo, Chionglong & Liang, Yongping, 2010. "Payment shock and mortgage performance," Journal of Housing Economics, Elsevier, Elsevier, vol. 19(4), pages 295-314, December.
  2. Zhang, Yan, 2013. "Does loan renegotiation differ by securitization status? A transition probability study," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 22(3), pages 513-527.
  3. Been, Vicki & Weselcouch, Mary & Voicu, Ioan & Murff, Scott, 2013. "Determinants of the incidence of U.S. Mortgage Loan Modifications," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3951-3973.
  4. Anthony Pennington-Cross, 2006. "The duration of foreclosures in the subprime mortgage market: a competing risks model with mixing," Working Papers 2006-027, Federal Reserve Bank of St. Louis.
  5. Lei Ding & Roberto G. Quercia & Janneke Ratcliffe, 2008. "Post-purchase Counseling and Default Resolutions among Low- and Moderate-Income Borrowers," Journal of Real Estate Research, American Real Estate Society, American Real Estate Society, vol. 30(3), pages 315-344.
  6. W. Scott Frame & Lawrence J. White, 2009. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 09-03, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. Goodman, Allen C. & Smith, Brent C., 2010. "Residential mortgage default: Theory works and so does policy," Journal of Housing Economics, Elsevier, Elsevier, vol. 19(4), pages 280-294, December.
  8. Kashian, Russell & Cebula, Richard & Cramer, Eric, 2014. "Foreclosures in an Exurb: Multiple Empirical Analyses through a Prism," MPRA Paper 55557, University Library of Munich, Germany.
  9. Sewin Chan & Claudia Sharygin & Vicki Been & Andrew Haughwout, 2014. "Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 48(2), pages 342-379, February.
  10. Ioan Voicu & Marilyn Jacob & Kristopher Rengert & Irene Fang, 2012. "Subprime Loan Default Resolutions: Do They Vary Across Mortgage Products and Borrower Demographic Groups?," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 45(4), pages 939-964, November.
  11. Allen C. Goodman & Brent C. Smith, 2010. "Housing default: theory works and so does policy," Working Paper, Federal Reserve Bank of Richmond 10-10, Federal Reserve Bank of Richmond.
  12. James Kau & Donald Keenan & Constantine Lyubimov, 2014. "First Mortgages, Second Mortgages, and Their Default," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 48(4), pages 561-588, May.
  13. Smith, Brent C, 2011. "Stability in consumer credit scores: Level and direction of FICO score drift as a precursor to mortgage default and prepayment," Journal of Housing Economics, Elsevier, Elsevier, vol. 20(4), pages 285-298.
  14. Sarah W. Carroll & Wenli Li, 2008. "The homeownership experience of households in bankruptcy," Working Papers 08-14, Federal Reserve Bank of Philadelphia.

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