The Delinquency of Subprime Mortgages

Danis, Michelle A.; Pennington‐Cross, Anthony

doi:10.20955/wp.2005.022

Cited by 21 publications

(15 citation statements)

References 13 publications

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“…The CAP loan and borrower characteristics can be compared with the Loan Performance data reported in Danis and Pennington‐Cross (2008) and Pennington‐Cross and Ho (2010). As a first look at the performance and characteristics of CAP loans, we plot out the Kaplan‐Meier hazards and local regressions.…”

Section: Data and Specificationsmentioning

confidence: 99%

Mortgage Default and Prepayment Risks among Moderate‐ and Low‐Income Households

Quercia

Pennington‐Cross

Tian

2012

Real Estate Economics

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Using a unique sample of community reinvestment loans, we study the propensity of very low‐income households to terminate a mortgage and compare it to the outcomes for low‐income and moderate‐income households. The results indicate that, even within moderate‐ and low‐income segments, lower or very low income is associated with higher default and lower prepayment probabilities. In addition, depending on how low the borrower's income is, classic determinants of loan termination such as credit scores, the amount of equity in the home and local labor market conditions can have different impacts on default and prepayment probabilities.

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Section: Data and Specificationsmentioning

confidence: 99%

Mortgage Default and Prepayment Risks among Moderate‐ and Low‐Income Households

Quercia

Pennington‐Cross

Tian

2012

Real Estate Economics

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“…Prepayment penalties could increase the probability of default if they lower the cost of default relative to the cost of prepayment for financially distressed borrowers, or they could decrease the probability of default if loans with prepayment penalties carry lower interest rates. Quercia, Stegman and Davis (2007), Danis and Pennington‐Cross (2008), Rose (2008), Demyanyk and Van Hemert (2011) and Pennington‐Cross and Ho (2010) all find that prepayment penalties are associated with greater probabilities of default, although in Rose (2008) and Pennington‐Cross and Ho (2010) this result is somewhat dependent on the specification and type of loan used. All of the above papers except Demyanyk and Van Hemert (2011) use competing risk models that jointly consider the probabilities of prepayment and default, and they all find a negative relationship between prepayment penalties and the probability of prepayment, as one would expect.…”

Section: Literature Reviewmentioning

confidence: 92%

Origination Channel, Prepayment Penalties and Default

Rose¹

2012

Real Estate Economics

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This article presents evidence that nonbank-originated subprime mortgages have a higher probability of default than bank-originated subprime mortgages, but only for loans with prepayment penalties. Evidence also indicates that nonbanks price prepayment penalties less favorably to borrowers than banks do, and nonbanks originate disproportionately more loans with prepayment penalties in locales with less financially sophisticated borrowers. State antipredatory lending law provisions restricting the use of prepayment penalties eliminate the elevated default risk of nonbank originations relative to bank originations. These findings are consistent with incentives generated by nonbank compensation via yield spread premiums on loans with prepayment penalties.Of broad concern for our understanding of the recent foreclosure crisis and for housing and financial stability moving forward is the role of compensation incentives across origination channels in mortgage lending. The specific aspect of this concern addressed in this article is whether and why subprime loans originated by relatively less-supervised nondepository institution mortgage originators ("nonbanks") performed worse than subprime loans originated by depository institutions ("banks") primarily supervised by one of the federal financial regulatory agencies: the Federal Reserve, Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation, Office of Thrift Supervision (OTS) or National Credit Union Association. 1 Results indicate that nonbank originations have a higher probability of default than bank originations, but only for loans that include prepayment penalties. This is the first evidence linking greater default risk across origination channels to a specific loan feature and is consistent with a greater importance of yield spread premiums (YSPs) in compensation among nonbank originators than bank originators. * University of Maryland, Baltimore County, Baltimore, MD 21250 and Office of the Comptroller of the Currency, Washington, DC 20219 or mrose@umbc.edu. 1 Many examinations of mortgage lending by origination channel distinguish between originations by direct lenders ("retail") and by brokers ("wholesale"). Here, nonbank originations include both broker originations and originations by direct lenders that are not depository institutions. As is explained in the data and methodology section, the use of this categorization of origination channel is determined by data availability. C 2012 American Real Estate and Urban Economics Association 2 RoseThe article then presents further evidence that disparities by origination channel in pricing prepayment penalties, borrower financial sophistication and the role of antipredatory lending laws are also consistent with differing compensation incentives.The remainder of this article consists of six sections. The following two sections provide background information and discuss the relevant previous literature. The next sections present the article's hypotheses, describe the article's data so...

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“…During the SMC, many new mortgagors eventually had trouble making their monthly repayments when H started to decline and r ϵ increased to r ψ . The hypothesis that interest rate resets were central to causing the SMC may be explained as follows (see, for instance, ). Originators found mortgages attractive because of high r ψ .…”

Section: Subprime Mortgage Designmentioning

confidence: 99%

Optimal originator valuation and the global financial crisis

Petersen

Mukuddem‐Petersen

Thomas

et al. 2012

Optim Control Appl Methods

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SUMMARYIn this paper, we discuss subprime mortgage design in both a theoretical-and numerical-quantitative framework. In particular, we model mortgages that are able to fully amortize, voluntarily prepay (involving prepayment and possibly refinancing), or default. In this regard, we find that mortgage refinancing is curtailed by high loan-to-value ratios because of house price depreciation, whereas low loan-to-value ratios increase mortgagor house equity. Furthermore, an optimal originator valuation problem under mortgage origination is solved. In this case, optimal mortgage value and rates as well as profit are computed. The paper supports the view that the subprime mortgage crisis was partially caused by the intricacy of design of subprime mortgages that led to information (asymmetry, contagion, inefficiency, and loss) problems, valuation opaqueness, and ineffective risk mitigation.

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The Delinquency of Subprime Mortgages

Cited by 21 publications

References 13 publications

Mortgage Default and Prepayment Risks among Moderate‐ and Low‐Income Households

Mortgage Default and Prepayment Risks among Moderate‐ and Low‐Income Households

Origination Channel, Prepayment Penalties and Default

Optimal originator valuation and the global financial crisis

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