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Modelling Mortgage Terminations in Turbulent Times
Author(s) -
Cooperstein Richard L.,
Redburn F. Stevens,
Meyers Harry G.
Publication year - 1991
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 - 10.1111/1540-6229.00563
Subject(s) - default , equity (law) , economics , interest rate , econometrics , monetary economics , actuarial science , financial economics , finance , political science , law
Techniques used to predict mortgage defaults during a relatively stable period proved less successful during the turbulent financial cycle of the early 1980s. An alternative specification of the relationship between defaults, homeowner equity, and interest‐rate movements better captures the effect of interest rates on default probability. Results confirm the powerful effect of equity on mortgage defaults and the strong, but asymmetric, influence of interest rates on both defaults and prepayments. The new specification allows direct measurement of the interest‐rate effect on defaults, distinguishing the effect when rates rise or fall.