Advanced Search
MyIDEAS: Login

Did prepayments sustain the subprime market?

Contents:

Author Info

  • Geetesh Bhardwaj
  • Rajdeep Sengupta

Abstract

This paper demonstrates that the reason for widespread default of mortgages in the subprime market was a sudden reversal in the house price appreciation of the early 2000's. Using loan-level data on subprime mortgages, we observe that the majority of subprime loans were hybrid adjustable rate mortgages, designed to impose substantial financial burden on reset to the fully indexed rate. In a regime of rising house prices, a financially distressed borrower could avoid default by prepaying the loan and our results indicate that subprime mortgages originated between 1998 and 2005 had extremely high prepayment rates. However, a sudden reversal in house price appreciation increased default in this market because it made this prepayment exit option cost-prohibitive.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://research.stlouisfed.org/wp/2008/2008-039.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2008-039.

as in new window
Length:
Date of creation: 2008
Date of revision:
Handle: RePEc:fip:fedlwp:2008-039

Contact details of provider:
Postal: P.O. Box 442, St. Louis, MO 63166
Fax: (314)444-8753
Web page: http://www.stlouisfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Subprime mortgage;

This paper has been announced in the following NEP Reports:

References

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.:
as in new window
  1. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 179-96, March-May.
  2. Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Where's the smoking gun? a study of underwriting standards for US subprime mortgages," Working Papers 2008-036, Federal Reserve Bank of St. Louis.
  3. Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
  4. Gary Gorton, 2008. "The Panic of 2007," Yale School of Management Working Papers amz2372, Yale School of Management.
  5. Kau, James B, et al, 1993. "Option Theory and Floating-Rate Securities with a Comparison of Adjustable- and Fixed-Rate Mortgages," The Journal of Business, University of Chicago Press, vol. 66(4), pages 595-618, October.
  6. Paul Bennett & Richard Peach & Stavros Peristiani, 1998. "Structural change in the mortgage market and the propensity to refinance," Staff Reports 45, Federal Reserve Bank of New York.
  7. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 677-708.
  8. Craig P. Aubuchon & David C. Wheelock, 2008. "How much have U.S. house prices fallen?," National Economic Trends, Federal Reserve Bank of St. Louis, issue Aug.
  9. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56.
  10. Hurst, Erik & Stafford, Frank, 2004. "Home Is Where the Equity Is: Mortgage Refinancing and Household Consumption," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(6), pages 985-1014, December.
  11. Christopher J. Mayer & Karen Pence, 2008. "Subprime Mortgages: What, Where, and to Whom?," NBER Working Papers 14083, National Bureau of Economic Research, Inc.
  12. Karl E. Case & Robert J. Shiller, 2003. "Is There a Bubble in the Housing Market?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(2), pages 299-362.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. James B. Bullard & Christopher J. Neely & David C. Wheelock, 2009. "Systemic risk and the financial crisis: a primer," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 403-418.
  2. Geetesh Bhardwaj & Rajdeep Sengupta, 2008. "Where's the smoking gun? a study of underwriting standards for US subprime mortgages," Working Papers 2008-036, Federal Reserve Bank of St. Louis.
  3. Amir E. Khandani & Andrew W. Lo & Robert C. Merton, 2009. "Systemic Risk and the Refinancing Ratchet Effect," Harvard Business School Working Papers 10-023, Harvard Business School, revised Jul 2010.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedlwp:2008-039. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anna Xiao).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.