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Mortgage Default

Paper Session

Saturday, Jan. 5, 2019 10:15 AM - 12:15 PM

Hilton Atlanta, 217
Hosted By: American Real Estate and Urban Economics Association
  • Chair: Benjamin Keys, University of Pennslyvania

Correlation in Mortgage Defaults

Chao Ma
,
Xiamen University
Hongbiao Zhao
,
Shanghai University of Finance and Economics

Abstract

Previous studies have made numerous efforts in estimating the default risk for individual mortgages. However, the risk of mortgage-backed securities or banks' mortgage portfolios also depends on the correlation among individual mortgages. We conduct formal statistical tests and find that conditional on the typical observable factors affecting individual mortgage default risk, there is still a large degree of correlation in defaults that would generate time clustering in defaults. We further conduct a variety of robustness checks and find that this residual correlation cannot be explained by the missing observable macroeconomic variables (e.g. national GDP growth or stock market returns) or the unobserved location-specific time-invariant frailty. To quantify the degree of this residual correlation, we calibrate a residual Gaussian copula correlation parameter after conditioning on the individual default intensities estimated from the Cox hazard model.

How Is Financial Literacy Important in Mortgage Market? Different Evidence from Urban China

Zan Yang
,
Tsinghua University
Ying Fan
,
National University of Singapore

Abstract

Household mortgages have significant implications for the financial well-being of individual households and for the whole economy. However, In China, the use of mortgages of household is very limited given high amount of informal borrowing or total saving in financing their home. This study puts efforts to understand this phenomenon from the role of financial literacy. Using household survey data, this study examines the effect of financial literacy on household mortgage decisions in housing purchases in urban China. Different from other countries, we find that more financially sophisticated households are of the early adopters of mortgages. We further find that more financially literate households are likely to have a higher mortgage demand in terms of loan-to-value ratio. These relationships are different from the findings in some western countries. This study highlights the importance of financial literacy in mortgage market development in China. It suggests that one mechanism to hasten the financial development of a country is to increase financial literacy among its citizens.

House Price Markups and Mortgage Defaults

William Larson
,
Federal Housing Finance Agency
Paul Carrillo
,
George Washington University
William Doerner
,
Federal Housing Finance Agency (FHFA)

Abstract

The transaction price of identical housing units can vary widely due to heterogeneity in buyer and seller preferences, appraisers, and search costs, generating "markups" above or below the average market price. These markups are mean reverting upon subsequent transactions, suggesting transitory factors play a role in same-unit dynamics. We show markups are an important driver of mortgage delinquencies, defaults, prepayments, and credit losses conditional on default. In general, our findings highlight several important aspects of mortgage risk management, including underwriting, insurance, and unit-level house value dynamics.

The Impact of Repossession Risk on Mortgage Default

Terry O'malley
,
Central Bank of Ireland

Abstract

"This paper studies the effect of removing repossession risk on a borrower’'s decision to default on their mortgage. I exploit quasi-experimental variation in home-repossession law generated by a legal ruling in Ireland, which retroactively removed repossession risk on properties mortgaged before a certain date. Using matched data, sampled locally around this cut-off date, and a difference-in-differences research design, I find that the removal of credible repossession risk led to an immediate increase in mortgage default of 0.5 percentage points a quarter. Consistent with economic models of mortgage default, I find that the effect is driven by borrowers with low and negative home equity, but also by those with lower incomes and higher interest rates."
Discussant(s)
Lindsay Relihan
,
London School of Economics
Changcheng Song
,
National University of Singapore
Lauren Lambie-Hanson
,
Federal Reserve Bank of Philadelphia
Marianna Kudlyak
,
Federal Reserve Bank of San Francisco
JEL Classifications
  • G1 - General Financial Markets
  • D8 - Information, Knowledge, and Uncertainty