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Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages

Author

Listed:
  • Agata M. Lozinskaia

    () (National Research University Higher School of Economics)

  • Evgeniy M. Ozhegov

    () (National Research University Higher School of Economics)

  • Alexander M. Karminsky

    () (National Research University Higher School of Economics)

Abstract

This paper investigates the distribution of relative credit losses given mortgage default for loans provided by a major government-sponsored creditor in a local area. We use borrower’s individual and loan-level data on residential mortgages originated in the period 2008–2012. Our numerical analysis indicates that mortgages bunching at certain Loan-to-Value ratios (LTV) led to a discontinuity in relative credit loss given mortgage default. Through regression analysis, we demonstrate discrete jumps in the approximated historical credit losses generated by loans with a high LTV ratios and find thresholds allowing the segmentation of loans according their credit risk. In addition, our results suggest that mortgage insurance is a potentially valuable instrument for compensation for expected loss in certain risk segments.

Suggested Citation

  • Agata M. Lozinskaia & Evgeniy M. Ozhegov & Alexander M. Karminsky, 2016. "Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages," HSE Working papers WP BRP 55/FE/2016, National Research University Higher School of Economics.
  • Handle: RePEc:hig:wpaper:55/fe/2016
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    References listed on IDEAS

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    More about this item

    Keywords

    discontinuity; credit risk; mortgage default; government mortgage lending programs; loss evaluation.;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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