IDEAS home Printed from https://ideas.repec.org/p/fip/fedbwp/07-15.html
   My bibliography  Save this paper

Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures

Author

Listed:
  • Kristopher S. Gerardi
  • Adam Hale Shapiro
  • Paul S. Willen

Abstract

This paper provides the first rigorous assessment of the homeownership experiences of subprime borrowers. We consider homeowners who used subprime mortgages to buy their homes, and estimate how often these borrowers end up in foreclosure. In order to evaluate these issues, we analyze homeownership experiences in Massachusetts over the 1989–2007 period using a competing risks, proportional hazard framework. We present two main findings. First, homeownerships that begin with a subprime purchase mortgage end up in foreclosure almost 20 percent of the time, or more than 6 times as often as experiences that begin with prime purchase mortgages. Second, house price appreciation plays a dominant role in generating foreclosures. In fact, we attribute most of the dramatic rise in Massachusetts foreclosures during 2006 and 2007 to the decline in house prices that began in the summer of 2005.

Suggested Citation

  • Kristopher S. Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbwp:07-15
    as

    Download full text from publisher

    File URL: http://www.bostonfed.org/economic/wp/wp2007/wp0715.htm
    Download Restriction: no

    File URL: http://www.bostonfed.org/economic/wp/wp2007/wp0715.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hua He & Neil D. Pearson, 1991. "Consumption and Portfolio Policies With Incomplete Markets and Short-Sale Constraints: the Finite-Dimensional Case," Mathematical Finance, Wiley Blackwell, vol. 1(3), pages 1-10.
    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, vol. 29(4), pages 365-392, December.
    3. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, vol. 35(3), pages 278-296, May.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. John P. Herzog & James S. Earley, 1970. "Home Mortgage Delinquency and Foreclosure," NBER Books, National Bureau of Economic Research, Inc, number herz70-1.
    6. Kau, James B. & Keenan, Donald C. & Muller III, Walter J. & Epperson, James F., 1995. "The Valuation at Origination of Fixed-Rate Mortgages with Default and Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 11(1), pages 5-36, July.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Mortgage loans - Massachusetts ; Foreclosure - Massachusetts ; Home ownership - Massachusetts;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedbwp:07-15. 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: (Catherine Spozio). General contact details of provider: http://edirc.repec.org/data/frbbous.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.