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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Volume (Year): 33 (2006) Issue (Month): 3 (November) Pages: 241-258 Download reference. The following formats are available: HTML
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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.
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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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