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Estimation of Mortgage Defaults Using Disaggregate Loan History Data
Author(s) -
Vandell Kerry D.,
Thibodeau Thomas
Publication year - 1985
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00356
Subject(s) - default , underwriting , equity (law) , loan , economics , fixed interest rate loan , mortgage underwriting , actuarial science , econometrics , financial economics , mortgage insurance , finance , insurance policy , casualty insurance , political science , law
This paper addresses, theoretically and empirically, the structure of influences affecting the default option in mortgage contracts. A formal theoretical model recognizes that a number of loan and non‐loan related effects beyond equity in the unit could influence the default decision. These include 1) payment levels relative to income, which could displace other investment opportunities or cause a need for borrowing or sale to meet mortgage obligations; 2) current and expected neighborhood and housing market conditions, in particular the expected relative rate of appreciation of the unit and the relative cost of homeownership; 3) economic conditions; 4) wealth; 5) borrower characteristics proxying for variability in income or “crisis” events; as well as 6) transactions costs incurred upon default. Estimates of the model making use of a micro‐level sample of individual loan histories over a twelve year period, supplemented by longitudinal census and economic information, find a number of these “other” effects important. Simulations find several of them to dominate the equity effect on default and to help explain why some households with zero or negative equity may not default, while others with positive equity may. The implications of these results for appropriate specification of the pricing model describing the default option and for appropriate underwriting of AMIs are noted.