Valuing Mortgage Insurance Contracts in Emerging Market Economies

We develop a new option-based method for the valuation of mortgage insurance contracts in closed form in an economy where agents are risk neutral. While the proposed valuation method is general and can be used in any market, it may be particularly useful in emerging market economies where other existing methods may be either inappropriate or are too difficult to implement because of the lack of relevant data. As an application, we price a typical Serbian government-backed mortgage insurance contract.     

Mortgage Default with Asymmetric Information

This article analyzes mortgage-market equilibrium when borrower default costs are private information. By applying the approach of Rothschild and Stiglitz (1976), it is shown that asymmetric information regarding default costs distorts the contract choices available in the mortgage market, preventing safe borrowers (those with high default costs) from fully satisfying their demand for mortgage debt. Large loans are available for a substantial interest-rate premium, but only risky borrowers find this premium worth paying. The article builds on an empirical literature designed to test the ruthless-default principle from option-based models of mortgage pricing. That literature provides evidence against ruthless behavior, suggesting that default costs play an important role in borrower decisions. The article takes a further step by arguing that such costs are private information, which has important implications for market equilibrium.     

Bias in an Empirical Approach to Determining Bond and Mortgage Risk Premiums

Empirical studies of bond and commercial mortgage performance often quantify a required risk premium by examining the difference between the promised yield and the realized yield as adjusted for default occurrence. These studies omit the effects of various other sources of risk, however, including collateral asset market risk, interest rate risk, and possibly call risk. These omissions downwardly bias the empirical risk premium estimate on the debt. In this paper, we disentangle and quantify the sources of this bias by modeling secured coupon debt (the commercial mortgage) as used in the calculation of a realized investment return. We consider deterministic and stochastic interest rate economies with mortgage contracts that are either noncallable or subject to a temporary prepayment lockout period. Given realistic parameter values associated with the term structure, underlying asset dynamics, and debt contracting, we show that the magnitude of the bias can be significant.     

Valuation of Mortgage Servicing Rights with Foreclosure Delay and Forbearance Allowed

We develop a bivariate binomial model to price Mortgage Servicing Rights (MSRs). Our model is an improvement over previous MSR pricing models by explicitly incorporating the realistic assumptions that there are additional costs involved in servicing delinquent loans. In addition to the Hilliard et al. mortgage-pricing tree, we extend additional sub-branches to model the borrower's decision of prepayment, cure, and foreclosure after a loan becomes delinquent. We then investigate how the value of the Mortgage Servicing Right varies with interest rate volatility, house price volatility, delinquency options, deficiency judgments, default penalties, forbearance periods, and speed of adjustments factors. JEL Classification: C15, G21     

The valuation at origination of fixed-rate mortgages with default and prepayment

This paper develops a model to rationally price fixed-rate mortgages, using the arbitrage principles of option pricing theory. The paper incorporates amortization, prepayment and default in valuing the mortgage. Having completely specified the model, numerical procedures value the different features of the mortgage contract under a variety of economic conditions. The necessity of having both the interest rate and the house price as explanatory variables, due to the interaction of default and prepayment, is demonstrated. The numerical solutions presented center around mortgage pricing at origination. Thus, variations in the equilibrium contract rate are examined for differing economic conditions and changes in the contract. Finally, by presenting a complete model, the paper yields insights for the existence of common institutional practices.     

Discrimination in Lending: Theory and Evidence

Using a general equilibrium model of credit market discrimination, I find that both taste-based discrimination and statistical discrimination have similar predictions for the intergroup differences in loan terms. The commonly held view has been that if taste-based discrimination exists, loans approved to minority borrowers will have higher expected profitability than those to majorities with comparable credit background. I show that the validity of this profitability view depends crucially on how expected loan profitability is measured. I also show that taste-based discrimination must exist if loans to minority borrowers have higher expected rates of return or lower expected rates of default loss than those to majorities with the same exogenous characteristics observed by lender at the time of loan originations. My analysis suggests that the valid method to test for taste-based discrimination should be reduced-form regressions. Empirically, I fail to find supporting evidence for the existence of taste-based discrimination.     

Explicit tests of contingent claims models of mortgage default

This paper provides explicit and powerful tests of contingent claims approaches to modeling mortgage default. We investigate a model of frictionless default (i.e., one in which transactions costs, reputation costs, and moving costs play no role) and analyze its implications-the relationship between equity and default, the timing of default, its dependence upon initial conditions, and the severity of losses. Absent transactions costs and other market imperfections, economic theory makes well-defined predictions about these various outcomes.The empirical analysis is based upon two particularly rich bodies of micro data: one indicating the default and loss experience of all mortgages purchased by the Federal Home Mortgage Corporation (Freddie Mac), and a large sample of all repeat sales of single family houses whose mortgages were purchased by Freddie Mac since 1976.     

Optimal Put Exercise: An Empirical Examination of Conditions for Mortgage Foreclosure

Implicit in option-pricing models of mortgage valuation are threshold levels of put-option value that must be crossed to induce borrower default. There has been little research into what these threshold values are that come out of pricing models or how they compare to exercised option values seen in empirical data. This study decomposes boundary conditions for optimal default exercise to look at the economic dynamics that should lead to optimal default timing. Empirical data on FHA insured mortgage foreclosures is then examined to discern the predictive influence of optimal-option-valuation-and-exercise variables on observed default timing and values. Interesting results include a new understanding of how to measure and use property equity variables during economic downturns, house-price index ranges over which default is exercised for various classes of borrowers, and implied differences in appreciation rates between market-price indices and foreclosed properties.     

Appraisal Quality and Residential Mortgage Default: Evidence from Alaska

We empirically examine the effect of appraisal quality on subsequent mortgage loan performance using data from the high volatility housing market of Alaska in the 1980s. We develop measures of appraisal quality by computing the residual between a hedonic estimate of house value using available information from other appraisals compared to actual ex ante appraised value. We then estimate proportional hazard models of mortgage default and find that several measures of appraisal quality, particularly appraised value in excess of hedonic estimates, are significantly related to default risk. Using valuations subsequent to loan default, we are also able to evaluate how well house price indices perform in terms of estimating current loan-to-value and offer some additional evidence on the controversy over the role of net equity versus trigger events as determinants of mortgage default. We also show that defaults are related to ex ante measures of housing market conditions, with additional implications for underwriting policies and the current industry trend away from traditional appraisal and toward automated valuation.     

对创建我国农业保险外部发展环境的几点思考

2005年以来,我国农业保险业迎来了一个全新的发展机遇,而良好的外部环境是农业保险发展的重要推动力.本文从财政补贴、税收优惠、监管制度、宣传教育四个方面入手,努力从宏观上创建有利于我国农业保险发展的良好的外部环境.     

Embedded Options in the Mortgage Contract

Loss mitigation is the process by which lenders attempt to minimize losses associated with foreclosure. As competition increases in the mortgage industry, lenders and servicers are under great pressure to adopt loss mitigation tactics rather than simply use foreclosure as the means of dealing with borrowers in default. This study presents a mortgage-pricing model that fully specifies all borrower options with respect to default, including the ability to reinstate the mortgage out of default. We document the impact of various loss mitigation programs, including forbearance and antideficiency judgments, as well as the value of credit on borrower default behavior.     

The Hazard Rates of First and Second Defaults

This article examines hazards of repeated mortgage default, conditional on reinstating out of an initial default episode. Results indicate that subsequent default risk for reinstated borrowers is significantly greater than the risk of first default, especially during the first two years after a default episode. In addition, economic factors helpful in predicting first defaults are not helpful in predicting subsequent default episodes. This has important implications for mortgage investors and servicers as industry foreclosure avoidance efforts intensify.     

Mortgage Default: Classification Trees Analysis

We apply the powerful, flexible, and computationally efficient nonparametric Classification and Regression Trees (CART) algorithm to analyze real estate mortgage data. CART is particularly appropriate for our data set because of its strengths in dealing with large data sets, high dimensionality, mixed data types, missing data, different relationships between variables in different parts of the measurement space, and outliers. Moreover, CART is intuitive and easy to interpret and implement. We discuss the pros and cons of CART in relation to traditional methods such as linear logistic regression, nonparametric additive logistic regression, discriminant analysis, partial least squares classification, and neural networks, with particular emphasis on real estate. We use CART to produce the first academic study of Israeli mortgage default data. We find that borrowers features, rather than mortgage contract features, are the strongest predictors of default if accepting icbadli borrowers is more costly than rejecting good ones. If the costs are equal, mortgage features are used as well. The higher (lower) the ratio of misclassification costs of bad risks versus good ones, the lower (higher) are the resulting misclassification rates of bad risks and the higher (lower) are the misclassification rates of good ones. This is consistent with real-world rejection of good risks in an attempt to avoid bad ones.     

Competing Risks of Mortgage Termination: Who Refinances,Who Moves,and Who Defaults?

The Journal of Real Estate Finance and Economics - Why, when, and who terminates their mortgages? The primary reasons for mortgage termination are refinancing, selling of the property, and default....     

运用抵押率降低贷款行业风险

恰当地管理贷款行业中存在的风险至关重要。长期以来,放贷人借助首付准则和抵押贷款保险来降低风险敞口。本文讨论了抵押贷款行业中风险管理的各种方法,着重讨论了欧美的情况。     

Mortgage Default during the U.S. Mortgage Crisis

Which theory can quantitatively explain the rise in mortgage defaults during the U.S. mortgage crisis? This paper finds that the double‐trigger hypothesis, which attributes mortgage default to the joint occurrence of negative equity and a life event such as unemployment, is consistent with the evidence. By contrast, a traditional frictionless default model strongly overpredicts the increase in default rates. This paper provides microfoundations for double‐trigger behavior in a model where unemployment causes liquidity problems for the borrower. This framework implies that mortgage crises may be mitigated at a lower cost by bailing out borrowers instead of lenders.     

House‐Price Expectations,Alternative Mortgage Products,and Default

The goal of this paper is to better understand the forces that spurred use of alternative mortgages during the housing boom. A theoretical model shows that, when future house‐price expectations become more favorable, reducing default concerns, mortgage choices shift toward alternative products, which are characterized by backloading of payments. The empirical work confirms this prediction by showing that an increase in past house‐price appreciation, which captures more favorable expectations for the future, raises the market share of alternative mortgages. In addition, the paper tests the fundamental presumption that backloaded mortgages are more likely to default, finding support for this view.