Subprime mortgage design

Bhardwaj, Geetesh; Sengupta, Rajdeep

doi:10.1016/j.jbankfin.2011.12.012

Cited by 14 publications

(6 citation statements)

References 30 publications

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“…to use TrueLTV for academic research. 26 The LP dataset contains both Alt-A and subprime mortgages; we focus on Alt-A rather than subprime because subprime ARM contracts typically contained floors such that the interest rate could not go lower than the initial rate (Bhardwaj and Sengupta 2011). Alt-A mortgages are also referred to as "near prime" and are linked to borrowers who are characterized by either minor credit quality issues or an inability or unwillingness to provide full documentation of income and assets.…”

Section: Datamentioning

confidence: 99%

Payment Size, Negative Equity, and Mortgage Default

Fuster

Willen

2012

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractSurprisingly little is known about the importance of mortgage payment size for default, as efforts to measure the treatment effect of rate increases or loan modifi cations are confounded by borrower selection. We study a sample of hybrid adjustable-rate mortgages that have experienced large rate reductions over the past years and are largely immune to these selection concerns. We show that interest rate changes dramatically affect repayment behavior. Our estimates imply that cutting a borrower's payment in half reduces his hazard of becoming delinquent by about two-thirds, an effect that is approximately equivalent to lowering the borrower's combined loan-to-value ratio from 145 to 95 (holding the payment fi xed). These fi ndings shed light on the driving forces behind default behavior and have important implications for public policy.

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Section: Datamentioning

confidence: 99%

Payment Size, Negative Equity, and Mortgage Default

Fuster

Willen

2012

SSRN Journal

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“…This corresponds notably to the rise in subprime lending to borrowers with greater repayment risk, especially up to 2007. It can be argued (Bhardwaj and Sengupta 2012) that the increased rate of ARM activity is premised on the idea of a bridge loan for property anticipated to increase in price by both borrower and lender.…”

Section: Choosing An Arm 2007-2013mentioning

confidence: 99%

A Farewell to ARMs or Ever Changing Market Segments?

Chen

Stafford

2018

J Real Estate Finan Econ

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The mortgage market has given rise to a changing and diverse set of borrowers actively using ARMs. Data from the Panel Study of Income Dynamics (PSID) for 2007 and 2013-2015 are used to study borrowing decisions. One view is that an ARM should be offered and taken by those better able to respond to an upward reset. Yet favorable economic conditions induce a demand for mortgages, including by higher risk borrowers, and for these households transactions occur at higher rates, often as ARMs, especially as of 2007. Panel analysis confirms some response to the spread but also to changing demand for mortgages in the shorter run. During the boom, the use of ARMs as a tool for 'affordability' led to actual transaction rates exceeding those for fixed rate mortgages. Analysis confirms substantial payment difficulties. Yet, analysis of mortgage transitions, 2007-13, establishes that the 'affordability' component to ARM, though less significant, still was present. ARMs were often taken by minorities and those with less education and with family income under $60,000 per year.

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“…Let P 0 = 1 be the price of the property at time 0, when a loan of the same amount is taken to purchase the property (or against the property as collateral). At time T the price of the property is P T , and the loan is terminated, resulting either in a prepayment fee k plus outstanding loan amount or default, in which case the lender recovers an amount R. For simplicity of analysis at this stage we assume 0 interest rate up to time T ; we can view the interest payments as being built into k or R, ignoring, as a first approximation, defaults prior to time T (for more on early defaults see [7]). The borrower refinances if P T is above a threshold P * (say, the present value of future payments on a new loan) and defaults otherwise.…”

Section: The Subprime Structurementioning

confidence: 99%

“…(The prepayment fee feature has been controversial; see, for example, [14, page 50-51].) We refer to the studies [7,14,26] for details on the economic background, evolution and ramifications of the subprime mortgage market, which went through a major expansion in the mid 1990s.…”

Section: The Subprime Structurementioning

confidence: 99%

Temporal correlation of defaults in subprime securitization

Hillebrand¹,

Sengupta²,

Xu³

2012

cosa

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We examine the subprime market beginning with a subprime mortgage, followed by a portfolio of such mortgages and then a series of such portfolios. We obtain an explicit formula for the relationship between loss distribution and seniority-based interest rates. We establish a link between the dynamics of house price changes and the dynamics of default rates in the Gaussian copula framework by specifying a time series model for a common risk factor. We show analytically and in simulations that serial correlation propagates from the common risk factor to default rates. We simulate prices of mortgage-backed securities using a waterfall structure and find that subsequent vintages of these securities inherit temporal correlation from the common risk factor.

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Subprime mortgage design

Cited by 14 publications

References 30 publications

Payment Size, Negative Equity, and Mortgage Default

Payment Size, Negative Equity, and Mortgage Default

A Farewell to ARMs or Ever Changing Market Segments?

Temporal correlation of defaults in subprime securitization

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