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Loss given default of residential mortgages in a low LTV regime: Role of foreclosure auction process and housing market cycles

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  • Park, Yun W.
  • Bang, Doo Won

Abstract

Using loan-level foreclosure auction data we study the loss given default (LGD) of defaulted residential mortgages originated in Korea, a low LTV regime. We find that senior mortgages generate very low loss rates (5–10%) while losses of subordinated claims are in 30–50% range. We document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn. We also investigate how a broad set of time-of-origination and post-origination information on loan, collateral and borrower characteristics and foreclosure auction process influence the LGD of residential mortgages.

Suggested Citation

  • Park, Yun W. & Bang, Doo Won, 2014. "Loss given default of residential mortgages in a low LTV regime: Role of foreclosure auction process and housing market cycles," Journal of Banking & Finance, Elsevier, vol. 39(C), pages 192-210.
    • Handle: RePEc:eee:jbfina:v:39:y:2014:i:c:p:192-210
    DOI: 10.1016/j.jbankfin.2013.11.015
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    Cited by:

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    2. Shu Ling Chiang & Ming Shann Tsai & Shan Jiang, 2021. "The Influences of Foreclosure Factors on the Value, Yield, Duration and Convexity of a Mortgage," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 361-394, September.
    3. Kim, Kyung-Hwan & You, Seung Dong, 2021. "The Global Financial Crisis and transition out of homeownership in Korea," Journal of Housing Economics, Elsevier, vol. 54(C).
    4. Jihwan Kim, 2018. "Dissonance between formal and informal housing capital: The case of Korea," Environment and Planning A, , vol. 50(6), pages 1171-1188, September.
    5. Li, Aimin & Li, Zhiyong & Bellotti, Anthony, 2023. "Predicting loss given default of unsecured consumer loans with time-varying survival scores," Pacific-Basin Finance Journal, Elsevier, vol. 78(C).
    6. Wei-Ling Tsou & Chen-Yi Sun, 2021. "Consumers’ Choice between Real Estate Investment and Consumption: A Case Study in Taiwan," Sustainability, MDPI, vol. 13(21), pages 1-13, October.
    7. Peter-Hendrik Ingermann & Frederik Hesse & Christian Bélorgey & Andreas Pfingsten, 2016. "The recovery rate for retail and commercial customers in Germany: a look at collateral and its adjusted market values," Business Research, Springer;German Academic Association for Business Research, vol. 9(2), pages 179-228, August.
    8. Shi, Xiaojun & Tang, Qihe & Yuan, Zhongyi, 2017. "A limit distribution of credit portfolio losses with low default probabilities," Insurance: Mathematics and Economics, Elsevier, vol. 73(C), pages 156-167.
    9. Tsai, Ming Shann & Chiang, Shu Ling & Miller, Chen, 2016. "A study on the distribution of the foreclosure lag, its expected capital opportunity cost and its analyses," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 156-170.
    10. Hung Xuan Do & Daniel Rösch & Harald Scheule, 2020. "Liquidity Constraints, Home Equity and Residential Mortgage Losses," The Journal of Real Estate Finance and Economics, Springer, vol. 61(2), pages 208-246, August.
    11. Arnab Biswas & Hamilton Fout & Anthony Pennington-Cross, 2023. "Mortgage Losses under Alternative Property Disposition Approaches: Deed-in-Lieu, Short Sales, and Foreclosure Sales," The Journal of Real Estate Finance and Economics, Springer, vol. 66(3), pages 603-635, April.

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    More about this item

    Keywords

    Foreclosure auction process; Residential mortgages; Loss given default; Low LTV regime; Housing market cycle;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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