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A dynamic look at subprime loan performance

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  • Michelle A. Danis
  • Anthony Pennington-Cross

Abstract

This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage. Using a sample of subprime mortgages from the Loan performance database on securitized private-label pool collateral, we utilize a two-step estimation procedure to control for the endogeneity of delinquency in an estimation of default and prepayment probabilities. We find strong support for the *distressed prepayment* theory that very delinquent loans are more likely to prepay than to default and that the rate of increase of prepayment is substantially larger as delinquency intensity increases. Delinquency predominately leads to termination of a loan through prepayment while negative equity leads to termination through default.

Suggested Citation

  • Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
  • Handle: RePEc:fip:fedlwp:2005-029
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Anthony Pennington-Cross, 2010. "The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 109-129, February.
    2. Tyler T. Yang & Jessie Y. Zhang, 2014. "Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets," Chapters,in: The Global Financial Crisis and Housing, chapter 10, pages 231-261 Edward Elgar Publishing.
    3. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, June.
    4. repec:kap:jrefec:v:56:y:2018:i:2:d:10.1007_s11146-017-9597-0 is not listed on IDEAS
    5. Roberto Quercia & Jonathan Spader, 2008. "Does homeownership counseling affect the prepayment and default behavior of affordable mortgage borrowers?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(2), pages 304-325.
    6. Josephson, Anna Leigh & Marshall, Maria I., 2014. "The Demand and Supply for Post-Katrina Disaster Aid: A Triple-Hurdle Model of SBA Disaster Loans for Small Businesses in Mississippi," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170177, Agricultural and Applied Economics Association.
    7. W. Scott Frame & Lawrence J. White, 2009. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 09-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    8. Giang Ho & Anthony Pennington-Cross, 2006. "Loan servicer heterogeneity and the termination of subprime mortgages," Working Papers 2006-024, Federal Reserve Bank of St. Louis.
    9. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
    10. Kelly, Austin, 2007. "Zero down payment mortgage default," MPRA Paper 4318, University Library of Munich, Germany.
    11. Dennis Capozza & Thomas Thomson, 2006. "Subprime Transitions: Lingering or Malingering in Default?," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 241-258, November.
    12. Roberto G. Quercia & Michael A. Stegman & Walter R. Davis, 2007. "The impact of predatory loan terms on subprime foreclosures: The special case of prepayment penalties and balloon payments," Housing Policy Debate, Taylor & Francis Journals, vol. 18(2), pages 311-346, January.
    13. Daniel Immergluck, 2008. "The accumulation of foreclosed properties: trajectories of metropolitan REO inventories during the 2007–2008 mortgage crisis," FRB Atlanta Community and Economic Development Discussion Paper 2008-02, Federal Reserve Bank of Atlanta.
    14. repec:gam:jjrfmx:v:11:y:2017:i:1:p:2-:d:124612 is not listed on IDEAS
    15. Anna Maria Santiago & George C. Galster & Ana H. Santiago-San Roman & Cristina M. Tucker & Angela A. Kaiser & Rebecca A. Grace, 2010. "Foreclosing on the American dream? The financial consequences of low-income homeownership," Housing Policy Debate, Taylor & Francis Journals, vol. 20(4), pages 707-742, September.
    16. Sewin Chan & Claudia Sharygin & Vicki Been & Andrew Haughwout, 2014. "Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 342-379, February.

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