Estimating Loan‐to‐Value Distributions |
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| Authors: | Arthur Korteweg Morten Sorensen |
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| Affiliation: | 1. University of Southern California Marshall School of Business Los Angeles, CA;2. Columbia Business School New York, NY 10027, Copenhagen Business School Frederiksberg, Denmark, NBER and SIFR |
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| Abstract: | We estimate a model of house prices, combined loan‐to‐value ratios (CLTVs) and trade and foreclosure behavior. House prices are only observed for traded properties and trades are endogenous, creating sample‐selection problems for existing approaches to estimating CLTVs. We use a Bayesian filtering procedure to recover the price path for individual properties and produce selection‐corrected estimates of historical CLTV distributions. Estimating our model with transactions of residential properties in Alameda, California, we find that 35% of single‐family homes are underwater, compared to 19% estimated by existing approaches. Our results reduce the index revision problem and have applications for pricing mortgage‐backed securities. |
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