Mortgage Loss Severities: What Keeps Them so High?
49 Pages Posted: 19 Mar 2019 Last revised: 29 Apr 2020
Date Written: 2019-03-19
Mortgage loss-given-default (LGD) increased significantly when house prices plummeted and delinquencies rose during the financial crisis, but it has remained over 40 percent in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis are due to a combination of an overhang of crisis-era foreclosures and prolonged foreclosure timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5â€“8 percentage points, depending on the trade-off between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities in spite of their benefits of increasing loan modifications and enhancing consumer protections.
Keywords: loss-given default (LGD), foreclosure timelines, regulatory changes, Heckman two-stage correction, accelerated failure time model
JEL Classification: C24, C41, G01, G18, G21
Suggested Citation: Suggested Citation