The Impact of Loan-to-Value on the Default Rate of Residential Mortgage-Backed Securities

13 Pages Posted: 28 Jul 2016

See all articles by Luis Otero González

Luis Otero González

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Pablo Duran Santomil

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Rubén Lado-Sestayo

University of Coruña - Facultad de Ciencias Economicas y Empresariales

Milagros Vivel Búa

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies

Date Written: July 22, 2016

Abstract

This paper analyzes the validity of using the loan-to-value (LTV) ratio to explain the behavior of mortgage borrowers at an empirical level. To perform this analysis we use data for mortgage loan portfolios securitized in Spain during the period 2005-8. In the regression models developed, we find that higher initial LTV ratios are associated with greater default risk. The relation between the probability of default and LTV seems to be nonlinear, and a sharp increase is seen for values greater than 80%. Our findings confirm the adequacy of the new Basel III proposal that sets nonlinear capital requirement levels for banks holding residential mortgage loans at different LTV ratios. However, the significance shown in the regression models estimated with the "seasoning" variable could be considered in order to improve the models used to measure capital requirements.

Keywords: securitization, subprime, loan-to-value, default, conditional probability

Suggested Citation

Otero González, Luis and Duran Santomil, Pablo and Lado-Sestayo, Rubén and Vivel Búa, Milagros, The Impact of Loan-to-Value on the Default Rate of Residential Mortgage-Backed Securities (July 22, 2016). Journal of Credit Risk, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2814533

Luis Otero González (Contact Author)

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain

Pablo Duran Santomil

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Faculty of Economic Science and Business Studies
Av/Burgo das Nacións s/n
Santiago, A Coruña 15704
Spain

Rubén Lado-Sestayo

University of Coruña - Facultad de Ciencias Economicas y Empresariales ( email )

Facultad de Economía y Empresa
Campus de Elviña s/n
A Coruña, A Coruña 15071
Spain

Milagros Vivel Búa

Universidade de Santiago de Compostela - Faculty of Economic Science and Business Studies ( email )

Avda. Juan XXIII s/n
Santiago, A Coruña 15704
Spain
981 563100 Ext.11606 (Phone)

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