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Home Equity, Home Value, and Determinants of Mortgage Defaults During the Credit Crisis

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  • Faten Sabry
  • Ignacio Franceschelli
  • Drew Claxton

Abstract

We evaluate the relative importance of loan and borrower characteristics at origination, changes in home equity, and potential errors in appraisal values in explaining the probability of a borrower's decision to default. We estimate multinomial logistic models of default and prepayment using loan-level data for more than 3 million subprime mortgage loans originated between 2005 and 2007. We find that 44.8% of subprime borrowers were underwater by April 2011, that original credit attributes and potential appraisal errors had small effects on a borrower's probability of default, and that changes in home equity had the largest effect on a borrower's probability of default.

Suggested Citation

  • Faten Sabry & Ignacio Franceschelli & Drew Claxton, 2016. "Home Equity, Home Value, and Determinants of Mortgage Defaults During the Credit Crisis," Journal of Real Estate Practice and Education, Taylor & Francis Journals, vol. 19(2), pages 125-148, January.
    • Handle: RePEc:taf:rjrpxx:v:19:y:2016:i:2:p:125-148
    DOI: 10.1080/10835547.2016.12091762
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