Risk Based Capital Requirements for Mortgage Loans

41 Pages Posted: 9 Jan 2002

See all articles by Paul S. Calem

Paul S. Calem

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Michael LaCour-Little

Federal National Mortgage Association (Fannie Mae); California State University at Fullerton

Date Written: November 2001

Abstract

We develop estimates of risk-based capital requirements for single-family mortgage loans held in portfolio by financial intermediaries. Our method relies on simulation of default and loss probability distributions via simulation of changes in economic variables with conditional default probabilities calibrated to recent actual mortgage loan performance data from the 1990s. Based on simulations with varying input parameters, we find that appropriate capital charges for credit risk vary substantially with loan or borrower characteristics and are generally below the current regulatory standard. These factors may help explain the high degree of securitization, or regulatory capital arbitrage, observed for this asset category.

Keywords: Capital, mortgage, risk, regulation

JEL Classification: G21, G38

Suggested Citation

Calem, Paul S. and LaCour-Little, Michael, Risk Based Capital Requirements for Mortgage Loans (November 2001). FEDS Working Paper No. 2001-60. Available at SSRN: https://ssrn.com/abstract=295633 or http://dx.doi.org/10.2139/ssrn.295633

Paul S. Calem (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Michael LaCour-Little

Federal National Mortgage Association (Fannie Mae) ( email )

1100 15th St NW
Washington, DC 20005
United States
202-752-3318 (Phone)

California State University at Fullerton ( email )

5133 Mihaylo Hall
Fullerton, CA 92834-6848
United States
657-278-4014 (Phone)
657-278-2161 (Fax)

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