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A dynamic look at subprime loan performance

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  • Michelle A. Danis
  • Anthony Pennington-Cross

Abstract

This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage. Using a sample of subprime mortgages from the Loan performance database on securitized private-label pool collateral, we utilize a two-step estimation procedure to control for the endogeneity of delinquency in an estimation of default and prepayment probabilities. We find strong support for the *distressed prepayment* theory that very delinquent loans are more likely to prepay than to default and that the rate of increase of prepayment is substantially larger as delinquency intensity increases. Delinquency predominately leads to termination of a loan through prepayment while negative equity leads to termination through default.

Suggested Citation

  • Michelle A. Danis & Anthony Pennington-Cross, 2005. "A dynamic look at subprime loan performance," Working Papers 2005-029, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:2005-029
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    References listed on IDEAS

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    Cited by:

    1. Anthony Pennington-Cross, 2010. "The Duration of Foreclosures in the Subprime Mortgage Market: A Competing Risks Model with Mixing," The Journal of Real Estate Finance and Economics, Springer, vol. 40(2), pages 109-129, February.
    2. Tyler T. Yang & Jessie Y. Zhang, 2014. "Mortgage defaults and risk-based capital: post-global financial crisis development and implications for emerging markets," Chapters, in: Susan Wachter & Man Cho & Moon Joong Tcha (ed.), The Global Financial Crisis and Housing, chapter 10, pages 231-261, Edward Elgar Publishing.
    3. Dror Parnes, 2023. "Typical States and Their Risks for Mortgage Loans," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 21(2), pages 395-415, June.
    4. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "Subprime refinancing: equity extraction and mortgage termination," Working Papers 2006-023, Federal Reserve Bank of St. Louis.
    5. Bo Liu & Tien Foo Sing, 2018. "“Cure” Effects and Mortgage Default: A Split Population Survival Time Model," The Journal of Real Estate Finance and Economics, Springer, vol. 56(2), pages 217-251, February.
    6. Roberto Quercia & Jonathan Spader, 2008. "Does homeownership counseling affect the prepayment and default behavior of affordable mortgage borrowers?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 27(2), pages 304-325.
    7. Josephson, Anna Leigh & Marshall, Maria I., 2014. "The Demand and Supply for Post-Katrina Disaster Aid: A Triple-Hurdle Model of SBA Disaster Loans for Small Businesses in Mississippi," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170177, Agricultural and Applied Economics Association.
    8. W. Scott Frame & Lawrence J. White, 2009. "Technological Change, Financial Innovation, and Diffusion in Banking," Working Papers 09-03, New York University, Leonard N. Stern School of Business, Department of Economics.
    9. Giang Ho & Anthony Pennington-Cross, 2006. "Loan servicer heterogeneity and the termination of subprime mortgages," Working Papers 2006-024, Federal Reserve Bank of St. Louis.
    10. Antje Berndt & Burton Hollifield & Patrik Sandås, 2021. "What Broker Charges Reveal About Subprime Mortgage Credit Risk," The Journal of Real Estate Finance and Economics, Springer, vol. 63(2), pages 280-326, August.
    11. Khandani, Amir E. & Lo, Andrew W. & Merton, Robert C., 2013. "Systemic risk and the refinancing ratchet effect," Journal of Financial Economics, Elsevier, vol. 108(1), pages 29-45.
    12. Richard Chamboko & Jorge Miguel Bravo, 2020. "A Multi-State Approach to Modelling Intermediate Events and Multiple Mortgage Loan Outcomes," Risks, MDPI, vol. 8(2), pages 1-29, June.
    13. Daniel Immergluck, 2009. "The accumulation of foreclosed properties: trajectories of metropolitan REO inventories during the 2007–2008 mortgage crisis," Community Development Innovation Review, Federal Reserve Bank of San Francisco, issue 1, pages 07-42.
    14. Dennis Capozza & Thomas Thomson, 2006. "Subprime Transitions: Lingering or Malingering in Default?," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 241-258, November.
    15. Roberto G. Quercia & Michael A. Stegman & Walter R. Davis, 2007. "The impact of predatory loan terms on subprime foreclosures: The special case of prepayment penalties and balloon payments," Housing Policy Debate, Taylor & Francis Journals, vol. 18(2), pages 311-346, January.
    16. Ran Deng & Shermineh Haghani, 2017. "FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks," JRFM, MDPI, vol. 11(1), pages 1-15, December.
    17. Anna Maria Santiago & George C. Galster & Ana H. Santiago-San Roman & Cristina M. Tucker & Angela A. Kaiser & Rebecca A. Grace, 2010. "Foreclosing on the American dream? The financial consequences of low-income homeownership," Housing Policy Debate, Taylor & Francis Journals, vol. 20(4), pages 707-742, September.
    18. Sewin Chan & Claudia Sharygin & Vicki Been & Andrew Haughwout, 2014. "Pathways After Default: What Happens to Distressed Mortgage Borrowers and Their Homes?," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 342-379, February.

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