A Dynamic Double-Trigger Model of Multifamily Mortgage Default

This study advances the commercial mortgage literature by providing theory and methods for incorporating both equity and cash-flow considerations in default models. We use local market conditions to compute a (joint) probability that default is in-the-money, based on both equity and cash-flow considerations. Statistical analysis is performed using data on multifamily mortgages originated in the 1980s and early 1990s. Simulations based on statistical modeling show advantages of the probabilistic double-trigger approach over other measures of equity and cash flow.     

Modeling the Conditional Probability of Foreclosure in the Context of Single-Family Mortgage Default Resolutions

Both empirical and pricing-simulation models of mortgage default focus on foreclosure in a one-step decision framework. Such models are misspecified to the extent that mortgage default and foreclosure are two separate decisions or events, where foreclosure is but one outcome of a default episode. This study examines the dynamics of mortgage borrower default episodes using a large sample of FHA-insured single-family mortgages. We estimate the influence of borrower characteristics, mortgage terms, and economic conditions on probabilities of various resolutions, highlighting under what conditions foreclosure is more likely to result from mortgage default.     

Cost-benefit analysis of single-family foreclosure alternatives

Over the last ten years, single-family mortgage lenders have become more aware of the financial benefits of finding alternatives to foreclosure for borrowers who default on their mortgage obligations. In this article, expected costs of foreclosure alternatives are parameterized to solve for minimum probabilities of borrower success necessary to make pursuing them profitable for lenders. These break-even probabilities are found to be very insensitive to changes in a variety of factors, including interest-rate environments and time horizons. Simulations are performed across house-price-deflation scenarios, loan-to-value ratios, and post-default cure rates. Stochastic processes are introduced through time distributions for foreclosure processing, property disposition, and house-price appreciation.     

Insight into the impact of energy caps on the costs of cellular networks with different layouts and technologies

We investigate the options of a network operator who needs to reduce its carbon footprint, expressed in terms of a global energy cap. First, we propose two ways to meet the energy limitations: by efficiently managing the energy consumed by the legacy networks or by installing additional capacity to the initial topology. We show the power savings that can be obtained in both cases as well as the incurred costs. Then we identify the initial composition of the network and the available technology in the upgrade phase as the factors that have the most influence on the ability of a network to meet the energy caps. Finally, we show the intrinsic unfairness of the energy caps, which are imposed to all the networks without taking into account the differences among them. In conclusion, we highlight the fundamental role of carbon markets and emission trading systems to guarantee a measure of fairness between the operators.     

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.     

Taxation and Housing Tenure Choice: The Case for Moderate-Income Homeownership

This study explores the financial value of homeownership for households in the 15% Federal tax bracket. Earlier studies concluded homeownership was only for households with high marginal tax rates, but they neglected how vacancy and turnover rates factor into rental prices. Principal innovations here include deriving long-run equilibrium rent-to-value ratios for the rental market and contrasting investor holding periods with lengths of household tenures. Tax regime simulations are performed for homeowner deductions and investor capital gains tax rates.     

Introduction to the Special Issue on Mortgage Modeling

The Journal of Real Estate Finance and Economics -     

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.     

Estimating the marginal contribution of adjustable-rate mortgage selection to termination probabilities in a nested model

In this study we measure the marginal contribution of ARMs to termination probabilities. To do this we develop a modified nested-logit model of mortgage selection and termination and identify the role of risk aversity in the selection process. Simulations of termination probabilities under different economic scenarios indicate how ARMs decrease overall portfolio risk through declines in prepayment probabilities which more than offset the increases in default probabilities associated with them.