Juvenile delinquent mortgages: bad credit or bad economy?
We study early default, defined as serious delinquency or foreclosure in the first year, among nonprime mortgages from the 2001 to 2007 vintages. After documenting a dramatic rise in such defaults and discussing their correlates, we examine two primary explanations: changes in underwriting standards that took place over this period and changes in the economic environment. We find that while credit standards were important in determining the probability of an early default, changes in the economy after 2004 - especially a sharp reversal in house price appreciation - were the more critical factor in the increase in default rates. A notable additional result is that despite our rich set of covariates, much of the increase remains unexplained, even in retrospect. Thus, the fact that the credit markets seemed surprised by the rate of early defaults in the 2006 and 2007 nonprime vintages becomes more understandable.
|Date of creation:||2008|
|Contact details of provider:|| Postal: 33 Liberty Street, New York, NY 10045-0001|
Web page: http://www.newyorkfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.ny.frb.org/rmaghome/staff_rp/ Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Karen M. Pence, 2003. "Foreclosing on opportunity: state laws and mortgage credit," Finance and Economics Discussion Series 2003-16, Board of Governors of the Federal Reserve System (U.S.).
- Kristopher S. Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007.
"Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures,"
07-15, Federal Reserve Bank of Boston.
- Paul S. Willen & Adam Hale Shapiro & Kristopher Gerardi, 2008. "Subprime Outcomes: Risky Mortgages, Homeownership Experiences, and Foreclosures," 2008 Meeting Papers 345, Society for Economic Dynamics.
- Yuliya Demyanyk & Otto Van Hemert, 2007. "Understanding the subprime mortgage crisis," Supervisory Policy Analysis Working Papers 2007-05, Federal Reserve Bank of St. Louis.
- Anthony Pennington-Cross & Giang Ho, 2010.
"The Termination of Subprime Hybrid and Fixed-Rate Mortgages,"
Real Estate Economics,
American Real Estate and Urban Economics Association, vol. 38(3), pages 399-426.
- Anthony Pennington-Cross & Giang Ho, 2006. "The termination of subprime hybrid and fixed rate mortgages," Working Papers 2006-042, Federal Reserve Bank of St. Louis.
- 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.
- Caplin, Andrew & Freeman, Charles & Tracy, Joseph, 1997. "Collateral Damage: Refinancing Constraints and Regional Recessions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 496-516, November.
- Deng, Yongheng & Gabriel, Stuart, 2006. "Risk-Based Pricing and the Enhancement of Mortgage Credit Availability among Underserved and Higher Credit-Risk Populations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(6), pages 1431-1460, September.
- Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2008.
"Negative equity and foreclosure: theory and evidence,"
Public Policy Discussion Paper
08-3, Federal Reserve Bank of Boston.
- Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
- Christopher J. Mayer & Karen Pence, 2008. "Subprime Mortgages: What, Where, and to Whom?," NBER Working Papers 14083, National Bureau of Economic Research, Inc.
- Christopher J. Mayer & Karen M. Pence, 2008. "Subprime mortgages: what, where, and to whom?," Finance and Economics Discussion Series 2008-29, Board of Governors of the Federal Reserve System (U.S.).
- Yongheng Deng & John M. Quigley & Robert Van Order, "undated".
"Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options,"
Zell/Lurie Center Working Papers
322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
- Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series qt96r560pg, Berkeley Program on Housing and Urban Policy.
- Eduardo S. Schwartz & Walter N. Torous, 1993. "Mortgage Prepayment and Default Decisions: A Poisson Regression Approach," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 431-449.
- 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.
- Ronel Elul, 2006. "Residential mortgage default," Business Review, Federal Reserve Bank of Philadelphia, issue Q3, pages 21-30.
- Yuliya Demyanyk & Otto Van Hemert, 2009.
"Understanding the subprime mortgage crisis,"
Federal Reserve Bank of San Francisco, issue Jan, pages -.
- 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.
When requesting a correction, please mention this item's handle: RePEc:fip:fednsr:341. 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: (Amy Farber)
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 references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link 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 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.