Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages

24 Pages Posted: 24 Jul 2016

See all articles by Agata Lozinskaia

Agata Lozinskaia

National Research University Higher School of Economics (Moscow)

Evgeniy Ozhegov

National Research University Higher School of Economics (Moscow)

Alexander Karminsky

National Research University Higher School of Economics (Moscow)

Date Written: July 22, 2016

Abstract

This paper investigates the distribution of relative credit losses given mortgage default for loans provided by a major government-sponsored creditor in a local area. We use borrower’s individual and loan-level data on residential mortgages originated in the period 2008–2012. Our numerical analysis indicates that mortgages bunching at certain Loan-to-Value ratios (LTV) led to a discontinuity in relative credit loss given mortgage default. Through regression analysis, we demonstrate discrete jumps in the approximated historical credit losses generated by loans with a high LTV ratios and find thresholds allowing the segmentation of loans according their credit risk. In addition, our results suggest that mortgage insurance is a potentially valuable instrument for compensation for expected loss in certain risk segments.

Keywords: discontinuity; credit risk; mortgage default; government mortgage lending programs; loss evaluation

JEL Classification: C21; G21; G32; R20; R58

Suggested Citation

Lozinskaia, Agata and Ozhegov, Evgeniy and Karminsky, Alexander M., Discontinuity in Relative Credit Losses: Evidence from Defaults on Government-Insured Residential Mortgages (July 22, 2016). Higher School of Economics Research Paper No. WP BRP 55/FE/2016, Available at SSRN: https://ssrn.com/abstract=2813102 or http://dx.doi.org/10.2139/ssrn.2813102

Agata Lozinskaia (Contact Author)

National Research University Higher School of Economics (Moscow) ( email )

Myasnitskaya street, 20
Moscow, Moscow 119017
Russia

Evgeniy Ozhegov

National Research University Higher School of Economics (Moscow) ( email )

Saint-Petersburg, Saint-Petersburg
Russia

Alexander M. Karminsky

National Research University Higher School of Economics (Moscow) ( email )

Myasnitskaya street 20
Moscow, Moscow 119017
Russia

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