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The Performance of UK Securitized Subprime Mortgage Debt: ‘Idiosyncratic’ Behaviour or Mortgage Design?

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  • Lanot, Gauthier
  • Leece, David

Abstract

The research estimates a competing risk model of mortgage terminations on a sample of UK securitized subprime mortgages. We consider whether the variety of mortgage contracts that were securitized explains the performance of subprime securities and their supposed ‘idiosyncratic’ behaviour. The methodological advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving mortgage choice and dynamic selection over time. We conclude that securities consisting of subprime loans can be given meaningful valuations on bank balance sheets if the performance of the different types of loans can be better understood. JEL Codes: G21 C13 C25 C51 D10 D14 E44

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27137.

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Date of creation: 15 Nov 2010
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Handle: RePEc:pra:mprapa:27137

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Keywords: Subprime mortgages; unobserved heterogeneity; loan performance; securitisation;

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References

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  1. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 26(2-3), pages 179-96, March-May.
  2. Marsha J. Courchane & Brian J. Surette & Peter M. Zorn, 2004. "Subprime Borrowers: Mortgage Transitions and Outcomes," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 29(4), pages 365-392, December.
  3. Gauthier Lanot, 2002. "On the Variance Covariance Matrix of the Maximum Likelihood Estimator of a Discrete Mixture," Econometrics, EconWPA 0211001, EconWPA.
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  8. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 20(3), pages 251-74, May.
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  15. Brueckner, Jan K., 1994. "The Demand for Mortgage Debt: Some Basic Results," Journal of Housing Economics, Elsevier, Elsevier, vol. 3(4), pages 251-262, December.
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  18. Rose, Morgan J., 2008. "Predatory lending practices and subprime foreclosures: Distinguishing impacts by loan category," Journal of Economics and Business, Elsevier, Elsevier, vol. 60(1-2), pages 13-32.
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  20. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, 06.
  21. Brent W. Ambrose & Michael LaCour-Little & Zsuzsa R. Huszar, 2005. "A Note on Hybrid Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 33(4), pages 765-782, December.
  22. 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.
  23. Deng, Yongheng & Gabriel, Stuart, 2006. "Risk-Based Pricing and the Enhancement of Mortgage Credit Availability among Underserved and Higher Credit-Risk Populations," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1431-1460, September.
  24. Cowan, Adrian M. & Cowan, Charles D., 2004. "Default correlation: An empirical investigation of a subprime lender," Journal of Banking & Finance, Elsevier, Elsevier, vol. 28(4), pages 753-771, April.
  25. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, 09.
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  27. John M. Clapp & Yongheng Deng & Xudong An, 2006. "Unobserved Heterogeneity in Models of Competing Mortgage Termination Risks," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 34(2), pages 243-273, 06.
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