Results

Table 3 shows the results of the logit regression described in Section 3.1 with the delinquency (panel A) or foreclosure (panel B) dummy variables 12 months after origination as the dependent variables. The explanatory variables are listed in the first column. Focusing on the marginal effect of the regression coefficients, defined in Equation 2, we see that the mortgage rate is the most important factor explaining cross-sectional differences in loan performance. The positive sign means that a...

Subprime Prime Rate Spread

Subprime Prime Spread Bbb Aaa Spread

In general, interest rates on subprime mortgages are higher than on prime mortgages to compensate the lender for the additional default risk associated with subprime loans. In this section we analyze the time series of the subprime-prime rate spread, both with and without adjustment for changes in loan and borrower characteristics. We focus on fixed-rate mortgages for this exercise. For hybrid mortgages the subprime-prime comparison is more complicated because i both the initial teaser rate and...

Subprime Mortgage Crisis Introduction

The subprime mortgage crisis of 2007 was characterized by an unusually large fraction of subprime mortgages originated in 2006 being delinquent or in foreclosure only months later. The crisis spurred massive media attention many different explanations of the crisis have been suggested. The goal of this paper is to answer the question What do the data tell us about the possible causes of the crisis To this end we use a loan-level database containing information on about half of all U.S. subprime...

Descriptive Analysis

In this paper we use and analyze a loan-level database that covers more than half of the U.S. subprime mortgage market.6 There is no consensus on the exact definition of a subprime mortgage loan. The term subprime can be used to describe certain characteristics of the borrower e.g., a FICO credit score less than 620 ,7 lender e.g., specialization in high-cost loans ,8 security of which the loan can become a part e.g., high projected default rate for the pool of underlying loans , or mortgage...

Non Linearity in the Sensitivity of the Mortgage Rate to the LTV

In Figure 3 we plotted the sensitivity of the fixed-rate and 2 28 hybrid mortgage rates to the first-lien LTV ratio. The sensitivity is defined as the regression coefficient on the first-lien LTV scaled by the standard deviation in a regression with the mortgage rate as dependent variable and the first-lien LTV, the second-lien LTV, and the other loan and borrower characteristics listed in Subsection 4.2, as independent variables. In this subsection we study the robustness of this result to...

Loanto Value Ratio and the Mortgage Rate

The combined LTV ratio rather than the first-lien LTV ratio is believed to be the main determinant of delinquency and foreclosure, because it is the burden of all the debt together that may trigger financial problems for the borrower. In contrast, the first-lien LTV is the more important determinant of the mortgage rate on a first-lien mortgage, because it captures the dollar amount at stake for the first-lien lender.14 In this subsection we try to determine whether lenders were aware that high...

Concluding Remarks

The subprime mortgage market experienced explosive growth between 2001 and 2006. Angell and Rowley 2006 and Kiff and Mills 2007 , among others, argue that this was facilitated by the development of private-label mortgage backed securities, which do not carry any kind of credit risk protection by the Government Sponsored Enterprises. Investors in search of higher yields kept increasing their demand for private-label mortgage-backed securities, which also led to sharp increases in the subprime...

Allowing for Interaction Terms

In this subsection we consider a logit regression with the delinquency rate as the dependent variable. As independent variables we use those from the baseline case presented in Table 3, plus the 10 interaction and quadratic terms that can be constructed from the four most important independent variables the FICO score, the CLTV ratio, the mortgage rate, and subsequent house price appreciation. Allowing for the above interaction terms, we take into account the effect of risk-layering such as,...

Empirical Analysis of Delinquency and Foreclosure Determinants

In this section we investigate to what extent a logit regression model can explain the high levels of delinquencies and foreclosures for the vintage 2006 mortgage loans in our database. The regression coefficients are assumed to be constant over time, which allows us to interpret the time variation in the regression error term. All results in this section will be based on a random sample of one million first-lien subprime mortgage loans, originated between 2001 and 2006. We run the following...

Loanto Value Ratio and the Delinquency Rate

Figure 6 shows the distribution of the CLTV ratio for all first-lien loans. About 30 percent have a CLTV smaller than 80 percent, about 20 percent have a CLTV of exactly 80 percent, and about 50 percent have a CLTV greater than 80 percent. The average CLTV increased slightly from 80 percent in 2001 to 84 percent in 2006 see Table 1 . In addition, the distribution shifted slightly to the right over time In 2001 the percentages of loans in these three CLTV categories was 35, 20, and 45 percent,...