Leverage and Mortgage Foreclosures
Posted: 9 Feb 2011
Date Written: February 8, 2011
In this paper, we deduce the default and prepayment characteristics of mortgages by examining the actual behavior of a large set of conformation fixed rate mortgages tracked over time. Employing reduced form pricing techniques, we are then able to fully value such mortgages, and so determine the cost as well as the probability of default for any particular mortgage. The analysis reveals the levels of foreclosures that can be expected when loans are leveraged at the high loan-to-value ratios characteristic of recent years.
Keywords: Mortgage, Default, Leverage
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