Does Default Probability Matter in Latin American Emerging Markets?

We analyze the impact of default probability in four leading Latin American stock markets: Argentina, Brazil, Chile, and Mexico. We find no positive default-risk premium except in the case of Brazil, and in fact we find a negative risk premium for Argentina and Mexico. The latter effect tends to fade when the analysis accounts for size and book-to-market variables. Although we find no size effect in any of the markets considered, the book-to-market effect is very strong in all of them, and our results reveal a consistent relationship, analogous to that found in more developed markets, between default probability and the size and book-to-market variables.     

Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?

We use a detailed dataset of seriously delinquent mortgages to examine the dynamic process of mortgage default—from initial delinquency and default to final resolution of the loan and disposition of the property. We estimate a two-stage competing risk hazard model to assess the factors associated with post-default outcomes, including whether a borrower receives a legal notice of foreclosure. In particular, we focus on a borrower’s ability to avoid a foreclosure auction by getting a modification, by refinancing the loan, or by selling the property. We find that the outcomes of the foreclosure process are significantly related to: loan characteristics including the borrower’s credit history, current loan-to-value and the presence of a junior lien; the borrower’s post-default payment behavior, including the borrower’s participation in foreclosure counseling; neighborhood characteristics such as foreclosure rates, recent house price depreciation and median income; and the borrower’s race and ethnicity.     

Buildings’ Energy Efficiency and the Probability of Mortgage Default: The Dutch Case

The Journal of Real Estate Finance and Economics - We investigate the relationship between building energy efficiency and the probability of mortgage default. To this end, we construct a novel...     

Subprime Loan Default Resolutions: Do They Vary Across Mortgage Products and Borrower Demographic Groups?

This paper examines default outcomes for subprime first lien loans during the recent subprime mortgage boom. It conducts this investigation in two phases. The paper first examines factors associated with pre-foreclosure outcomes for subprime mortgages in default. It then examines factors associated with different outcomes for loans that enter foreclosure. These factors include less understood elements such as mortgage product features and borrower demographics. The analysis is based on detailed loan-level data and employs multinomial logit models in a hazard framework. Results show that default resolutions vary with product features and borrower demographics. Adjustable rate and interest-only mortgages, and loans with low- or no-documentation are more likely to enter foreclosure proceedings, and, once in foreclosure, are more likely to become REO. The existence of junior liens increases the probability of the loan remaining in default. Owner-occupancy is associated with lower likelihood of foreclosure initiation and REO, and greater likelihood of curing default. Additionally, default outcomes are impacted by local legal, economic and housing market conditions, and the equity in the home.     

Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option

House price volatility; lender and borrower perception of price trends, loan and property features; and the borrower’s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for 20 counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly confirm the significance of the borrower’s put as an operative factor in default. At the same time, the results provide convincing evidence that the experience in Florida is in part driven by lenders and purchasers exhibiting euphoric behavior such that in markets with higher price appreciation there is a willingness to accept recent prior performance as an indicator of future risk. This connection illustrates a familiar moral hazard in the housing market due to the limited information about future prices.     

How Does the Use of Credit Default Swaps Affect Firm Risk and Value? Evidence from US Life and Property/Casualty Insurance Companies

This study uses a unique credit default swap (CDS) transaction data set of insurers to examine the effects of CDS usage on the risk profile and firm value of US insurance companies for the period 2001‐2009. Applying a Heckman two‐stage model to adjust for the potential endogeneity of CDS usage with respect to firm risk and firm value, we find consistent evidence that the utilization of CDS for income generation purposes is associated with greater market risk, deterioration of financial performance, and lower firm value, for both Life and Property/Casualty insurers.