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The Performance of UK Securitized Subprime Mortgage Debt: ‘Idiosyncratic’ Behaviour or Mortgage Design?

  • Lanot, Gauthier
  • Leece, David

The research estimates a competing risk model of mortgage terminations on a sample of UK securitized subprime mortgages. We consider whether the variety of mortgage contracts that were securitized explains the performance of subprime securities and their supposed ‘idiosyncratic’ behaviour. The methodological advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving mortgage choice and dynamic selection over time. We conclude that securities consisting of subprime loans can be given meaningful valuations on bank balance sheets if the performance of the different types of loans can be better understood. JEL Codes: G21 C13 C25 C51 D10 D14 E44

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 27137.

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Date of creation: 15 Nov 2010
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Handle: RePEc:pra:mprapa:27137
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  1. David Miles, 2005. "Incentives Information and Efficiency in the UK Mortgage Market," Economic Journal, Royal Economic Society, vol. 115(502), pages C82-C98, 03.
  2. John M. Quigley., 1993. "Explicit Tests of Contingent Claims Models of Mortgage Defaults," Economics Working Papers 93-221, University of California at Berkeley.
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  5. Phillips, Richard A & Rosenblatt, Eric & VanderHoff, James H, 1996. "The Probability of Fixed- and Adjustable-Rate Mortgage Termination," The Journal of Real Estate Finance and Economics, Springer, vol. 13(2), pages 95-104, September.
  6. 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, 06.
  7. Brueckner, Jan K., 1994. "The Demand for Mortgage Debt: Some Basic Results," Journal of Housing Economics, Elsevier, vol. 3(4), pages 251-262, December.
  8. 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.
  9. David M. Harrison & Thomas G. Noordewier & Abdullah Yavas, 2004. "Do Riskier Borrowers Borrow More?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 32(3), pages 385-411, 09.
  10. Gauthier Lanot, 2002. "On the Variance Covariance Matrix of the Maximum Likelihood Estimator of a Discrete Mixture," Econometrics 0211001, EconWPA.
  11. William P. Alexander & Scott D. Grimshaw & Grant R. McQueen & Barrett A. Slade, 2002. "Some Loans Are More Equal than Others: Third-Party Originations and Defaults in the Subprime Mortgage Industry," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(4), pages 667-697.
  12. Danis, Michelle A. & Pennington-Cross, Anthony, 2008. "The delinquency of subprime mortgages," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 67-90.
  13. Brent W. Ambrose & Michael LaCour-Little, 2001. "Prepayment Risk in Adjustable Rate Mortgages Subject to Initial Year Discounts: Some New Evidence," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(2), pages 305-327.
  14. 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.
  15. repec:cup:cbooks:9780521471626 is not listed on IDEAS
  16. Brueckner, Jan K, 2000. "Mortgage Default with Asymmetric Information," The Journal of Real Estate Finance and Economics, Springer, vol. 20(3), pages 251-74, May.
  17. Kau, James B, et al, 1993. "Option Theory and Floating-Rate Securities with a Comparison of Adjustable- and Fixed-Rate Mortgages," The Journal of Business, University of Chicago Press, vol. 66(4), pages 595-618, October.
  18. repec:cup:cbooks:9780521477444 is not listed on IDEAS
  19. James VanderHoff, 1996. "Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 379-406.
  20. John Clapp & Yongheng Deng & Xudong An, 2005. "Unobserved heterogeneity in Models of Competing Mortgage Termination Risks," Working Paper 8585, USC Lusk Center for Real Estate.
  21. Richard K. Green & James D. Shilling, 1997. "The Impact of Initial-Year Discounts on ARM Prepayments," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(3), pages 373-385.
  22. José A. Azevedo-Pereira & David P. Newton & Dean A. Paxson, 2002. "UK Fixed Rate Repayment Mortgage and Mortgage Indemnity Valuation," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 30(2), pages 185-211.
  23. Wayne R. Archer & David C. Ling, 1993. "Pricing Mortgage-Backed Securities: Integrating Optimal Call and Empirical Models of Prepayment," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 373-404.
  24. Rose, Morgan J., 2008. "Predatory lending practices and subprime foreclosures: Distinguishing impacts by loan category," Journal of Economics and Business, Elsevier, vol. 60(1-2), pages 13-32.
  25. Ambrose, Brent W & Sanders, Anthony B, 2003. "Commercial Mortgage-Backed Securities: Prepayment and Default," The Journal of Real Estate Finance and Economics, Springer, vol. 26(2-3), pages 179-96, March-May.
  26. Pennington-Cross, Anthony, 2003. "Credit History and the Performance of Prime and Nonprime Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 27(3), pages 279-301, November.
  27. Cowan, Adrian M. & Cowan, Charles D., 2004. "Default correlation: An empirical investigation of a subprime lender," Journal of Banking & Finance, Elsevier, vol. 28(4), pages 753-771, April.
  28. Brent W. Ambrose & Michael LaCour-Little & Zsuzsa R. Huszar, 2005. "A Note on Hybrid Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 765-782, December.
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