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Liquidity Constraints, Home Equity and Residential Mortgage Losses

Author

Listed:
  • Hung Xuan Do

    (Massey University
    University of Technology)

  • Daniel Rösch

    (University of Regensburg)

  • Harald Scheule

    (University of Technology)

Abstract

This paper analyses how mortgage borrower liquidity constraints and home equity drive the realized loss rates given default using loan-level data. We define defaulted loans with zero loss as cures and those with non-zero loss as non-cures. We find economically that borrower liquidity constraints and positive equity explain cure, while negative equity explains non-zero loss. The findings provide an important economic-rationale for a separation of the cure and loss processes in mortgage loss models and their applications such as loan pricing and bank capital regulation. The results have great relevance for the multi-trillion dollar mortgage industry for a more efficient capital allocation, better mortgage pricing and more forward-looking loan loss provisioning.

Suggested Citation

  • 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.
    • Handle: RePEc:kap:jrefec:v:61:y:2020:i:2:d:10.1007_s11146-019-09709-9
    DOI: 10.1007/s11146-019-09709-9
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    References listed on IDEAS

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    Cited by:

    1. Michelle Bergmann, 2020. "The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis," RBA Research Discussion Papers rdp2020-03, Reserve Bank of Australia.
    2. Rambod Rahmani & Marco Parola & Mario G. C. A. Cimino, 2024. "A machine learning workflow to address credit default prediction," Papers 2403.03785, arXiv.org.
    3. Emily Johnston Ross & Lynn Shibut, 2021. "Loss Given Default, Loan Seasoning and Financial Fragility: Evidence from Commercial Real Estate Loans at Failed Banks," The Journal of Real Estate Finance and Economics, Springer, vol. 63(4), pages 630-661, November.

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    More about this item

    Keywords

    Cure; Loss Given Default; Liquidity Constraints; Home Equity; Mortgage; Resolution; Selection;
    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
    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other

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