Adverse Selection in the Home Equity Line of Credit Market

31 Pages Posted: 19 Oct 2017

See all articles by Michael LaCour-Little

Michael LaCour-Little

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

Yanan Zhang

Government of the United States of America - Office of the Comptroller of the Currency (OCC)

Date Written: October 18, 2017

Abstract

Securitization has been widely assigned blame for contributing to the recent mortgage market meltdown and ensuing financial crisis. In this paper, we employ the OCC Home Equity database to develop estimates of default and prepayment probabilities for home equity lines of credit originated during 2004-2008 and tracked through 2014. Results show that securitized home equity loans bear both higher default and prepayment risk compared to loans held in portfolio by lenders, consistent with adverse selection in the securitization process. Spreads on securitized home equity lines are higher, as well, consistent with a “lemons spread”. Results are robust across multiple specifications, including models that address the endogenous decision to securitize, and support adoption of the credit risk retention rule for asset-backed securities.

Keywords: Mortgage Default and Prepayment, Home Equity Lines of Credit, Securitization

JEL Classification: G21, G28

Suggested Citation

LaCour-Little, Michael and Zhang, Yanan, Adverse Selection in the Home Equity Line of Credit Market (October 18, 2017). Available at SSRN: https://ssrn.com/abstract=3055371 or http://dx.doi.org/10.2139/ssrn.3055371

Michael LaCour-Little (Contact Author)

Federal National Mortgage Association (Fannie Mae) ( email )

3900 Wisconsin Avenue, NW
Washington, DC 20016-2892
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)

Yanan Zhang

Government of the United States of America - Office of the Comptroller of the Currency (OCC) ( email )

400 7th Street SW
Washington, DC 20219
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
37
Abstract Views
221
PlumX Metrics