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Screening Mortgage Default Risk: A Unified Theoretical Framework

  • Danny Ben-Shahar

    ()

    (The Arison School of Business, The Interdisciplianry Center Herzliya, P.O. Box 167, Herxljya 46150 Israel)

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    This study developed a unified framework for theoretically analyzing a set of mortgage attributes that screens borrower types according to their unobservable default risk. In the presence of asymmetric information, a self-selection process is attained, where lower default risk type borrowers choose a mortgage loan with constant over graduated payment, constant over price-leveladjusted payment, adjustable over fixed rate, low over high loanto-value ratio, and short over long maturity. The study thus examines, among others, various mortgage attributes, which have never previously been considered in the context of mortgage default under asymmetric information. Accordingly, the theoretical predictions produce further grounds for empirical research on mortgage default.

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    Article provided by American Real Estate Society in its journal journal of Real Estate Research.

    Volume (Year): 28 (2006)
    Issue (Month): 3 ()
    Pages: 215-240

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    Handle: RePEc:jre:issued:v:28:n:3:2006:p:215-240
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    American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323

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    Order Information: Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    1. Quigley, John M. & Van Order, Robert, 1991. "Defaults on mortgage obligations and capital requirements for U.S. savings institutions : A policy perspective," Journal of Public Economics, Elsevier, vol. 44(3), pages 353-369, April.
    2. James B. Kau & Donald C. Keenan & Taewon Kim, 1993. "Transaction Costs, Suboptimal Termination and Default Probabilities," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 247-263.
    3. Yongheng Deng & John M. Quigley & Robert Van Order, 1995. "Mortgage Default and Low Downpayment Loans: The Costs of Public Subsidy," NBER Working Papers 5184, National Bureau of Economic Research, Inc.
    4. Deng, Yongheng, 1997. "Mortgage Termination: An Empirical Hazard Model with a Stochastic Term Structure," The Journal of Real Estate Finance and Economics, Springer, vol. 14(3), pages 309-31, May.
    5. Peter M. Zorn & Michael J. Lea, 1989. "Mortgage Borrower Repayment Behavior: A Microeconomic Analysis with Canadian Adjustable Rate Mortgage Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 118-136.
    6. Vandell, Kerry D, 1978. "Default Risk under Alternative Mortgage Instruments," Journal of Finance, American Finance Association, vol. 33(5), pages 1279-96, December.
    7. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, 09.
    8. Chester Foster & Robert Order, 1985. "FHA Terminations: A Prelude to Rational Mortgage Pricing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 273-291.
    9. T. L. Tyler Yang, 1992. "Self-Selection in the Fixed-Rate Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(3), pages 359-391.
    10. Joe Peek & James A. Wilcox, 1991. "A real, affordable mortgage," New England Economic Review, Federal Reserve Bank of Boston, issue Jan, pages 51-66.
    11. James VanderHoff, 1996. "Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 379-406.
    12. Anthony M.J. Yezer & Robert F. Phillips & Robert P. Trost, 1994. "Bias in estimates of discrimination and default in mortgage lending: the effects of simultaneity and self-selection," Proceedings, Federal Reserve Bank of Philadelphia, pages 197-222.
    13. Quigley, John M & Van Order, Robert, 1995. "Explicit Tests of Contingent Claims Models of Mortgage Default," The Journal of Real Estate Finance and Economics, Springer, vol. 11(2), pages 99-117, September.
    14. Tyler T. Yang & Henry Buist & Isaac F. Megbolugbe, 1998. "An Analysis of the "Ex Ante" Probabilities of Mortgage Prepayment and Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(4), pages 651-676.
    15. Kau, James B. & Keenan, Donald C., 1999. "Patterns of rational default," Regional Science and Urban Economics, Elsevier, vol. 29(6), pages 765-785, November.
    16. Cunningham, Donald F & Capone, Charles A, Jr, 1990. " The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages," Journal of Finance, American Finance Association, vol. 45(5), pages 1687-1703, December.
    17. von Furstenberg, George M, 1969. "Default Risk on FHA-Insured Home Mortgages as a Function of the Terms of Financing: A Quantitative Analysis," Journal of Finance, American Finance Association, vol. 24(3), pages 459-77, June.
    18. 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.
    19. Michael Spence, 1973. "Job Market Signaling," The Quarterly Journal of Economics, Oxford University Press, vol. 87(3), pages 355-374.
    20. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
    21. Posey, Lisa L. & Yavas, Abdullah, 2001. "Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk," Journal of Urban Economics, Elsevier, vol. 49(1), pages 54-79, January.
    22. Ben-Shahar, Danny & Feldman, David, 2003. "Signaling-Screening Equilibrium in the Mortgage Market," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 157-78, March-May.
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