The Delinquency of Subprime Mortgages

Abstract

Abstract:The lag between the time that a borrower stops making payments on a mortgage and the termination of the loan plays a critical role in the costs borne by both borrower and lender on defaulted loans. While the prior literature uses a multinomial logit approach, statistical tests indicate that we cannot accept the associated assumption of Independence of Irrelevant Alternatives (IIA). Using a nested logit specification our results suggest that the recipe for delinquency involves young loans to low credit score borrowers with low or no documentation in housing markets with moderately volatile and flat or declining nominal house prices.

The role of neighborhood characteristics in mortgage default risk: Evidence from New York City

“…Recent research on non-prime mortgages has emphasized that it is the current, and not the initial LTV that increases the probability of delinquency and default (e.g., Demyanyk, 2009). Foreclosures happen less frequently in appreciating markets, most likely because financially-distressed borrowers can more easily sell their properties or refinance and prepay the remaining balance on their loans (e.g., Danis and Pennington-Cross, 2005;Schloemer et al, 2006).…”

Beyond the Transaction: Depository Institutions and Reduced Mortgage Default for Low-Income Homebuyers

“…Further, it offers advantages over the proportional hazards model in that it does not assume proportionality and that it is easily estimated (Quercia et al 2007). The primary disadvantage of the multinomial logit is the assumption that the alternatives are independent, or the Independence from Irrelevant Alternatives (IIA) assumption (Danis and Pennington Cross 2008). However, Hausmann tests are estimated for each of the models in this analysis, and confirm that the IIA assumption has not been violated.…”

The Determinants of Subprime Mortgage Performance Following a Loan Modification

“…A large body of literature exists on the determinants of mortgage default for prime mortgages (Deng et al 2000;Phillips and VanderHoff 2004;Quercia and Stegman 1992;B. W. Ambrose et al 1997) and subprime mortgages (Kau et al 2011;deRitis et al 2010;Danis and Pennington-Cross 2008) prior to the housing crisis. However, from the 1990s through the mid-2000s, mortgage underwriting standards declined substantially, resulting in an unprecedented national wave of default and foreclosure when house prices subsequently fell and economic conditions deteriorated (Demyanyk and Van Hemert 2011;Haughwout et al 2008;Mian and Sufi 2009).…”