Spatial Heterogeneity in the Borrowers' Mortgage Termination Decision – a Nonparametric Approach

93 Pages Posted: 19 Jun 2020

See all articles by Lu Fang

Lu Fang

Florida International University

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate

Date Written: February 29, 2020

Abstract

This paper attempts to address the issue of borrower heterogeneity when modelling a borrower’s mortgage loan termination behaviors (default and prepayment) by applying a nonparametric spatial model to a traditional competing-risks loan hazard model. In this spatial competing-risks hazard model, all of the parameters are allowed but not forced to vary across space. Using a sample of 30-year fixed-rate subprime mortgage loans for home purchase, this study finds a substantial level of spatial variation in a borrower’s responsiveness to interest rate change and housing equity change in exercising the default or prepayment option. Further analysis indicates that the observed spatial variation is associated with different levels of resistance to negative shocks, financial literacy, and financial constraints.

Keywords: Mortgage default, prepayment, options, borrower heterogeneity, spatial model

JEL Classification: G21, C14, C25, C21

Suggested Citation

Fang, Lu and Munneke, Henry J., Spatial Heterogeneity in the Borrowers' Mortgage Termination Decision – a Nonparametric Approach (February 29, 2020). Available at SSRN: https://ssrn.com/abstract=3611291 or http://dx.doi.org/10.2139/ssrn.3611291

Lu Fang (Contact Author)

Florida International University ( email )

Miami, FL
United States

Henry J. Munneke

University of Georgia - Department of Insurance, Legal Studies, Real Estate ( email )

Athens, GA 30602-6254
United States
(706) 542-0496 (Phone)
(706) 542-4295 (Fax)

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