Subprime mortgage default |
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| Institution: | 1. Department of Insurance, Legal Studies, Real Estate, University of Georgia, 298A, Brooks Hall, Athens, GA 30602, United States;2. THEMA, Université de Cergy-Pontoise, France;3. Department of Insurance, Legal Studies, Real Estate, University of Georgia, 286, Brooks Hall, Athens, GA 30602, United States;4. Department of Finance, Louisiana State University, 2163-B, Patrick F. Taylor Hall, Baton Rouge, LA 70803, United States;1. P. Sarkisov International Laboratory of Functional Glass-Based Materials, D. Mendeleyev University of Chemical Technology of Russia, Miusskaya pl. 9, Moscow 125047, Russia;2. Branch of Ufa State Petroleum Technological University, Devonskaya ul., 54a, Oktyabrskiy, Republic of Bashkortostan 452600, Russia;3. Research and Production Enterprise “VELIT”, Zavodskaya ul. 2, Istra-2, Moscow region 143500, Russia;4. Department of Materials Science, University of Milano-Bicocca, via Cozzi 55, Milano 20125, Italy;1. Departament de Matemàtiques i Informàtica, Universitat de Barcelona, 08007 Barcelona, Spain;2. Escola d''Enginyeria d''Igualada, UPC, 08700 Igualada, Barcelona, Spain;1. Departamento de Matemática, Instituto de Ciências Matemáticas e de Computação, Universidade de São Paulo, Caixa Postal 668, São Carlos, SP 13560-970, Brazil;2. Departamento de Matemática, Universidade Federal do Paraná, Caixa Postal 19081, Curitiba, PR 81531-990, Brazil;1. Departamento de Matemática, Universidade Federal de São Carlos, Caixa Postal 676, São Carlos, SP, 13565-905, Brazil;2. Departamento de Matemática, Instituto de Ciências Matemáticas e de Computação, Universidade de São Paulo, Caixa Postal 668, São Carlos, SP, 13560-970, Brazil;3. Department of Mathematics, Florida International University, Miami, FL, 33199, USA;1. Department of Mathematics, King''s College London, Strand, London WC2R 2LS, UK;2. Department of Mathematics, University of Wisconsin, 480 Lincoln Drive, Madison, WI 53706, USA;3. Department of Mathematics, University of Chicago, 734 S. University Avenue, Chicago, IL 60637, USA |
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| Abstract: | This paper constructs a reduced-form credit risk model of mortgage default. The data used is of privately-securitized subprime ARMs (adjustable rate mortgages), originated between 1997 and 2008, and observed between 2000 and 2009. The period studied thus encompasses the beginning of the subprime crisis. Given the estimated model, contractual properties of the loans are then used to infer the market price of default risk for the various quarters of origination. It is empirically determined that a change in the inherent nature of borrowers led to a deterioration in their default performance, a change which can be first detected in late 2004. On the other hand, the evidence also indicates that the secondary mortgage market became aware of this change at about this same time. The large rise in defaults in 2007 cannot, therefore, be attributed to any surprise other than the unexpectedly large fall in housing prices. |
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