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Subprime mortgage default

Author

Listed:
  • Kau, James B.
  • Keenan, Donald C.
  • Lyubimov, Constantine
  • Carlos Slawson, V.

Abstract

This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime crisis. Given the estimated model, contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination. It is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance, a change which can be first detected in late 2004. On the other hand, the evidence also indicates that the secondary mortgage market became aware of this change at about this same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices.

Suggested Citation

  • Kau, James B. & Keenan, Donald C. & Lyubimov, Constantine & Carlos Slawson, V., 2011. "Subprime mortgage default," Journal of Urban Economics, Elsevier, vol. 70(2), pages 75-87.
    • Handle: RePEc:eee:juecon:v:70:y:2011:i:2:p:75-87
    DOI: 10.1016/j.jue.2011.05.001
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    Cited by:

    1. Kelly, Robert & McCann, Fergal, 2016. "Some defaults are deeper than others: Understanding long-term mortgage arrears," Journal of Banking & Finance, Elsevier, vol. 72(C), pages 15-27.
    2. Kusum Mundra, 2020. "Immigrant and Minority Homeownership Experience: Evidence from the 2009 American Housing Survey," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 46(1), pages 53-81, January.
    3. Mundra, Kusum, 2013. "Minority and Immigrant Homeownership Experience: Evidence from the 2009 American Housing Survey," IZA Discussion Papers 7131, Institute of Labor Economics (IZA).
    4. Maximilian Schmeiser & Matthew Gross, 2016. "The Determinants of Subprime Mortgage Performance Following a Loan Modification," The Journal of Real Estate Finance and Economics, Springer, vol. 52(1), pages 1-27, January.
    5. Fernando Ferreira & Joseph Gyourko, 2015. "A New Look at the U.S. Foreclosure Crisis: Panel Data Evidence of Prime and Subprime Borrowers from 1997 to 2012," NBER Working Papers 21261, National Bureau of Economic Research, Inc.
    6. Andréas Heinen & Mi Lim Kim & Alfonso Valdesogo, 2015. "Regime switching House price dependence: Evidence from MSAs in the US," ERES eres2015_201, European Real Estate Society (ERES).
    7. MeiChi Huang, 2021. "Regime switches and permanent changes in impacts of housing risk factors on MSA‐level housing returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 310-342, January.
    8. Brent C. Smith & Anthony M. Yezer, 2025. "A Lucas Critique of Mortgage Lending: Theory, Evidence, and Implications," The Journal of Real Estate Finance and Economics, Springer, vol. 70(4), pages 637-676, May.
    9. Duanmu, Jun & Li, Yongjia & Tahsin, Salman & Xu, Jiayi, 2025. "Crop damage, local climate risk perceptions, and small business access to credit," International Review of Financial Analysis, Elsevier, vol. 102(C).
    10. Tahsin, Salman, 2022. "Home price growth and minority access to mortgage credit," Journal of Economics and Business, Elsevier, vol. 120(C).
    11. Andréas Heinen & James B. Kau & Donald C. Keenan & Mi Lim Kim, 2021. "Spatial Dependence in Subprime Mortgage Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 62(1), pages 1-24, January.

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    JEL classification:

    • C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
    • G1 - Financial Economics - - General Financial Markets

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