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The Subprime Virus
Author(s) -
Agarwal Sumit,
Ambrose Brent W.,
Yildirim Yildiray
Publication year - 2015
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 - 10.1111/1540-6229.12108
Subject(s) - foreclosure , default risk , synthetic cdo , mortgage underwriting , prime (order theory) , secondary mortgage market , default , economics , mortgage insurance , collateralized mortgage obligation , financial economics , econometrics , credit risk , actuarial science , finance , mathematics , combinatorics , casualty insurance , insurance policy
We examine the correlation between prime mortgage default risk and the introduction of subprime mortgages in a local area. We motivate our analysis with a model of a default contagion effect that spreads the effect of a mortgage foreclosure from one property to surrounding properties. Through numerical analysis, we demonstrate the effect of subprime mortgage originations to the risk of prime mortgages. Finally, we offer empirical support for our model by examining the spatial variation in MSA prime mortgage default rates and the level of subprime mortgage activity.