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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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    Citations

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    Cited by:

    1. 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.
    2. 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).
    3. 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.
    4. Maximilian D. Schmeiser & Matthew B. 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. Mundra, Kusum, 2013. "Minority and Immigrant Homeownership Experience: Evidence from the 2009 American Housing Survey," IZA Discussion Papers 7131, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Mortgage default; House price shocks;

    JEL classification:

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

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