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Mortgage Loss Severities: What Keeps Them So High?

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  • Xudong An
  • Lawrence R. Cordell

Abstract

Mortgage loss-given-default (LGD) increased significantly when house prices plummeted during the financial crisis, but it has remained over 40 percent in recent years, despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis is due to a combination of an overhang of crisis-era foreclosures and prolonged liquidation timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5 to 8 percentage points, depending on the tradeoff between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities despite their potential benefits of increasing loan modifications and enhancing consumer protections.

Suggested Citation

  • Xudong An & Lawrence R. Cordell, 2020. "Mortgage Loss Severities: What Keeps Them So High?," Working Papers 20-37, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:88789
    DOI: 10.21799/frbp.wp.2020.37
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    References listed on IDEAS

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    4. Cordell, Larry & Lambie-Hanson, Lauren, 2016. "A cost-benefit analysis of judicial foreclosure delay and a preliminary look at new mortgage servicing rules," Journal of Economics and Business, Elsevier, vol. 84(C), pages 30-49.
    5. Vassilis Lekkas & John M. Quigley & Robert Van Order, 1993. "Loan Loss Severity and Optimal Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 353-371, December.
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    Cited by:

    1. Mayock, Tom & Tzioumis, Konstantinos, 2021. "New construction and mortgage default," Journal of Banking & Finance, Elsevier, vol. 133(C).
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    More about this item

    Keywords

    loss-given default (LGD); foreclosure timelines; regulatory changes; Heckman two-stage model; accelerated failure time model;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • G01 - Financial Economics - - General - - - Financial Crises

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