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The Conditional Probability of Foreclosure: An Empirical Analysis of Conventional Mortgage Loan Defaults
Author(s) -
Phillips Richard A.,
VanderHoff James H.
Publication year - 2004
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/j.1080-8620.2004.00103.x
Subject(s) - prepayment of loan , foreclosure , default , economics , logit , loan , econometrics , synthetic cdo , payment , actuarial science , sample (material) , credit risk , monetary economics , finance , credit valuation adjustment , chemistry , chromatography , credit reference
This paper analyzes the factors affecting the conditional probability that defaulted residential mortgage loans will foreclose. We analyze a large national sample of conventional loans, which have been in default at least once during the 1988 to 1994 period. For such loans, lenders and borrowers either individually or jointly make choices which lead to the following outcomes: (1) resumption of payments, (2) termination by prepayment, or (3) foreclosure. Our estimates of a logit model indicate that termination option values and local area economic and housing market conditions affect default resolution probabilities. Perhaps more importantly, simulations using the logit model indicate that the efficiency of the default resolution process may be substantially improved by legal and regulatory reforms.