Non Stationarity of the Loanto Value Effect

The logit regression specification used in Section 3 assumes that the regression coefficients are constant over time. That is, the effect of a unit change in an explanatory variable on the delinquency or the foreclosure rate is the same in, for example, 2006 as it is in 2001, holding constant the values of the other explanatory variables. We test the validity of this assumption for all variables in our analysis by running cross-sectional OLS regressions for each calendar month from 2001 to 2006 and checking the stability of the regression coefficients. It turns out that the strongest rejection of a constant regression coefficient is for the CLTV ratio. In this section we first discuss this finding and then turn to the question of whether lenders were aware of the non-stationarity of the loan-to-value effect, by investigating the relationship between the loan-to-value ratio and mortgage rates over time.

12Shiller (2007) argues that house prices were too high compared to fundamentals in this period and refers to the house price boom as a classic speculative bubble largely driven by an extravagant expectation for future house price appreciation.

13Consistent with this finding, LaCour-Little (2007) shows that individual credit characteristics are important for mortgage product choice.

Win The Foreclosure Battle

Win The Foreclosure Battle

Get All The Support And Guidance You Need To Be A Success At Beating Foreclosure. This Book Is One Of The Most Valuable Resources In The World When It Comes To Successful Strategies To Save Your Home and Finances.

Get My Free Ebook

Post a comment