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A Note on Mortgage Risk: Default vs. Loss Rates

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  • Terrence M. Clauretie

Abstract

This note reexamines the role of the loan‐to‐value ratio on mortgage risk. Whereas previous studies have focused on the default rate as a function of this term, this study considers the additional effect on the loss rate of defaulted loans. Because the dollar loss per amount originated is the product of the default rate and the loss rate on defaulted loans, the impact of the loan‐to‐value ratio on both the default and loss rates is crucial to explaining the impact of the loan‐to‐value ratio on mortgage risk. I find that both rates are significantly positively related to loan‐to‐value ratio and that the loss rate accounts for between 13% and 20% of total loan‐to‐value impact.

Suggested Citation

  • Terrence M. Clauretie, 1990. "A Note on Mortgage Risk: Default vs. Loss Rates," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(2), pages 202-206, June.
    • Handle: RePEc:bla:reesec:v:18:y:1990:i:2:p:202-206
    DOI: 10.1111/1540-6229.00517
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    Cited by:

    1. David Feldman & Shulamith Gross, 2005. "Mortgage Default: Classification Trees Analysis," The Journal of Real Estate Finance and Economics, Springer, vol. 30(4), pages 369-396, June.
    2. Gordon W. Crawford & Eric Rosenblatt, 1995. "Efficient Mortgage Default Option Exercise: Evidence from Loss Severity," Journal of Real Estate Research, American Real Estate Society, vol. 10(5), pages 543-556.
    3. Gill, Balbinder Singh, 2024. "COVID-19 mortality risk premium and the interest rate on mortgage loans," International Review of Financial Analysis, Elsevier, vol. 93(C).
    4. Gill, Balbinder Singh, 2023. "Health uninsurance premium and mortgage interest rates," International Review of Financial Analysis, Elsevier, vol. 87(C).

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