Loss Severity on Residential Mortgages: Evidence from Freddie Mac's Newest Data

Posted: 13 Jun 2016

See all articles by Laurie S. Goodman

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center

Jun Zhu

Urban Institute

Date Written: August 2015

Abstract

In this article we analyze new loan-level data recently released by Freddie Mac on more than 17 million single-family mortgages to reveal a range of new and useful insights into the ultimate financial losses associated with a loan after it experiences a credit event. We conclude that mortgage insurance significantly lowers loss severities. We show that actual loss severities are higher than the preset severity schedule for loans with a loan-to-value (LTV) ratio of 60-80, relatively accurate for higher-LTV loans. We also find that small loans have higher severity than larger loans, that real-estate-owned (REO) sales have higher severity than short sales, and that there is no stable relationship between the state of origination and severity. Finally, we review the components of loss -- liquidation value, direct expenses, and lost interest -- and find that direct expenses and loss interest contribute significantly to the ultimate loss.

Keywords: Loss Severity, Freddie Mac, Loan-To-Value (LTV), Short-Sale, REO

Suggested Citation

Goodman, Laurie S. and Zhu, Jun, Loss Severity on Residential Mortgages: Evidence from Freddie Mac's Newest Data (August 2015). Journal of Fixed Income, Vol. 25, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=2784290

Laurie S. Goodman

The Urban Institute - Housing Finance Policy Center ( email )

2100 M Street NW
Washington, DC 20037
United States

Jun Zhu (Contact Author)

Urban Institute ( email )

2100 M Street N.W.
Washington, DC 20037
United States

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