The Determinants of Subprime Mortgage Performance Following a Loan Modification

Schmeiser, Maximilian D.; Gross, Matthew B.

doi:10.1007/s11146-015-9500-9

Cited by 18 publications

(5 citation statements)

References 35 publications

(25 reference statements)

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“…Subsequent studies (including U.S. Department of the Treasury, 2012;and Schmeiser and Gross, 2015) examining performance of loans modified later during the crisis period (through at least 2011), confirm the significant relationships to postmodification payment reduction and postmodification LTV ratio. Moreover, these studies demonstrate that principal reduction has a comparatively large impact on likelihood of redefault because of the joint effects of payment reduction and reduced LTV ratio.…”

Section: The Literature and Our Contributionmentioning

confidence: 84%

“…They examine modifications provided under the government-sponsored HAMP 2 Voicu, Weselcouch, and Tschirhart (2011), in addition to demonstrating that the likelihood of redefault is inversely related to both the amount of payment reduction and the amount of principal reduction, finds that modifications associated with the Treasury Department's Home Affordable Modification Program (HAMP) were less likely to redefault compared with non-HAMP modifications. In addition, Schmeiser and Gross (2015) also find that term extension modifications that increase the amount of principal due are most likely to redefault.…”

Section: The Literature and Our Contributionmentioning

confidence: 86%

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Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures?

Calem

Jagtiani

Maingi

2021

Journal of Real Estate Research

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This paper examines the redefault rate of mortgages that were selected for modification during 2008-2011, compared with that of similarly situated self-cured mortgages during the same period. We find that while the performance of both modified and self-cured loans improved dramatically over this period, the decline in the redefault rate for modified loans was substantially larger, and we attribute this difference to a few key factors. First, the repayment terms provided by modifications became increasingly generous, including the more frequent offering of principal reduction, resulting in greater financial relief to borrowers. Second, the later modifications also benefited from improving economic conditions -modification became more effective as unemployment rates declined and home prices recovered. Third, we find that the difference in redefault rate improvement between modified loans and self-cured loans is not fully explained by observable risk and economic variables. We attribute this residual difference to the servicers' learning process -so-called learning by doing. Early in the mortgage crisis, many servicers had limited experience selecting the best borrowers for modification. As modification activity increased, lenders became more adept at screening borrowers for modification eligibility and in selecting appropriate modification terms.

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Section: The Literature and Our Contributionmentioning

confidence: 84%

Section: The Literature and Our Contributionmentioning

confidence: 86%

Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures?

Calem

Jagtiani

Maingi

2021

Journal of Real Estate Research

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“…We use standard probit regression analysis to investigate the relationship between the probability of default and explanatory variables (Woolridge, 2012). In the mortgage default literature, probit regression is a well-accepted strategy for modeling mortgage defaults (Munnell et al, 1996;Anderson and VanderHoff, 1999;Ross, 2000;Danis and Pennington-Cross, 2005;Bajari et al, 2008;Guiso et al, 2009;Alfaro and Gallardo, 2012;An et al, 2012;Moulton et al, 2015;Schmeiser and Gross, 2016;Nakatani, 2020).…”

Section: Methodsmentioning

confidence: 99%

Loan to value ratio and housing loan default – evidence from microdata in India

Saha

Rooj

Sengupta

2022

IJOEM

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PurposeThis study aims to investigate the factors that drive housing loan default in India based on unique micro-level data drawn from a public sector bank's credit files with a national presence in India. The authors address endogeneity in the loan to value ratio (LTV) while deciphering the drivers of default.Design/methodology/approachThe study uses a probit regression approach to analyze the relationship between the probability of default and the explanatory variables. The authors introduce two instrumental variables to address the issue of endogeneity. The authors also add state-level demographic and several other control variables, including an indicator variable that captures the recent regulatory change. The authors’ analysis is based on 102,327 housing loans originated by the bank between January 2001 and December 2017.FindingsThe authors find that addressing the endogeneity issue is essential to specify default drivers, especially LTV, correctly. The nature of employment, gender, socio-religious category and age have a distinct bearing on housing loan defaults. Apart from the LTV ratio, the other key determinants of default are the interest rate, frequency of repayment, prepayment options and the loan period. The findings suggest that the population classification of branch location plays a significant role in loan default. The authors find that an increase in per capita income and an increase in the number of employed people in the state, which reflects borrowers' ability to pay by borrowers, reduce the probability of default. The change in the regulatory classification of loan assets by the Reserve Bank of India did not bear the main results.Research limitations/implicationsThe non-availability of the house price index in analyzing the default dynamics in the Indian housing finance market for the period covered under the study has constrained our analysis. The applicability of the equity theory of default, strategic default, borrowers' characteristics and personality traits are potential research areas in the Indian housing finance market.Practical implicationsThe study's findings are expected to provide valuable inputs to the banks and the housing finance companies to explore and formulate appropriate strategic options in lending to this sector. It has highlighted various vistas of tailor-making housing loan product offerings by the commercial banks to ensure and steady and healthy growth of their loan portfolio. It has also highlighted the regulatory and policy underpinnings to ensure the healthy growth of the Indian housing finance market.Originality/valueThe study provides a fresh perspective on the default drivers in the Indian housing finance market based on micro-level data. In our analysis, the authors find clear evidence of endogeneity in LTV and argue that any attempts to decipher the default drivers of housing loans without addressing the issue of endogeneity may lead to faulty interpretation. Therefore, this study is unique in recognizing endogeneity and has gone deeper in identifying the default drivers in the Indian housing market not addressed by earlier papers on the Indian housing market. The authors also control for the regulatory changes in the Indian housing finance market and include state-level control variables like per capita GDP and the number of workers per thousand to capture the borrowers' ability to pay characteristics.

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“…In this regard, several studies have focused on the United States using the information provided by foreclosure databases. In most of these studies, foreclosures are a variable explained by various factors, such as in Schmeiser and Gross [49]. According to the authors, mortgage defaults after the process of mortgage asset securitization were one of the main causes of foreclosures.…”

Section: Theorical Framework and Hypothesesmentioning

confidence: 99%

Impact of Evictions and Tourist Apartments on the Residential Rental Market in Spain

2021

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In recent decades, the analysis of residential rental prices in Spain has gained increasing attention. From a socio-economic viewpoint, the increase in long-term rentals compared to new home purchases by the new generations has led researchers to examine phenomena such as the growth of the tourism sector or foreclosures. This paper uses a panel data model to analyze the influence of the rate of foreclosure evictions and number of tourist apartments on residential rental prices in 50 provinces of Spain for the period 2015–2018. The results show that an increase in the number of tourist apartment vacancies increases residential rental prices, while an increase in the rate of foreclosure evictions causes residential rental prices to fall.

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The Determinants of Subprime Mortgage Performance Following a Loan Modification

Cited by 18 publications

References 35 publications

Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures?

Redefault Risk in the Aftermath of the Mortgage Crisis: Why Did Modifications Improve More than Self-Cures?

Loan to value ratio and housing loan default – evidence from microdata in India

Impact of Evictions and Tourist Apartments on the Residential Rental Market in Spain

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