Liquidity Constraints, Home Equity and Residential Mortgage Losses

50 Pages Posted: 2 Sep 2016 Last revised: 22 Jul 2018

See all articles by Hung Xuan Do

Hung Xuan Do

Massey University, Albany campus; University of Technology, Sydney

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: June 30, 2016

Abstract

This paper analyses how borrower liquidity constraints and home equity relate to the realized loss given default (LGD) using the quarterly U.S. residential mortgage loan-level data observed from Q2 2005 to Q1 2015. We define defaulted loans with zero-LGD as cure loans and those with non-zero LGD as non-cure loans. We find robust evidence that the borrower liquidity constraints and positive equity are explaining cure, while negative equity explains non-zero loss. However, a relationship between borrower liquidity constraints and the non-zero LGD is not economically meaningful. Our findings support to separate cure and non-cure loans in mortgage loss risk models.

Keywords: Cure, Loss Given Default, Liquidity Constraints, Home Equity, Mortgage, Selection

JEL Classification: G21, G28, C19

Suggested Citation

Do, Hung Xuan and Roesch, Daniel and Scheule, Harald, Liquidity Constraints, Home Equity and Residential Mortgage Losses (June 30, 2016). CIFR Paper No. 122/2016. Available at SSRN: https://ssrn.com/abstract=2833145 or http://dx.doi.org/10.2139/ssrn.2833145

Hung Xuan Do

Massey University, Albany campus ( email )

Auckland
New Zealand
+64 92136160 (Phone)
+64 92136160 (Fax)

HOME PAGE: http://www.massey.ac.nz/massey/expertise/profile.cfm?stref=972450

University of Technology, Sydney ( email )

PO Box 123
Broadway, 2007
Australia

Daniel Roesch

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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