A Dynamic Look at Subprime Loan Performance

FRB St. Louis Working Paper No. 2005-029A

31 Pages Posted: 28 Jul 2005

See all articles by Michelle A. Danis

Michelle A. Danis

Government of the United States of America - Office of Federal Housing Enterprise Oversight

Anthony Pennington-Cross

Marquette University - Dept. of Finance

Date Written: May 2005

Abstract

This paper examines the implications of delinquency on the performance of subprime mortgages. Specifically, we examine whether delinquency has any predictive power of the future performance of a mortgage. Using a sample of subprime mortgages from the Loan performance database on securitized private-label pool collateral, we utilize a two-step estimation procedure to control for the endogeneity of delinquency in an estimation of default and prepayment probabilities. We find strong support for the "distressed prepayment" theory that very delinquent loans are more likely to prepay than to default and that the rate of increase of prepayment is substantially larger as delinquency intensity increases. Delinquency predominately leads to termination of a loan through prepayment while negative equity leads to termination through default.

Keywords: Mortgages, Subprime, Delinquency

JEL Classification: G21, C25

Suggested Citation

Danis, Michelle A. and Pennington-Cross, Anthony N., A Dynamic Look at Subprime Loan Performance (May 2005). FRB St. Louis Working Paper No. 2005-029A, Available at SSRN: https://ssrn.com/abstract=761152 or http://dx.doi.org/10.2139/ssrn.761152

Michelle A. Danis (Contact Author)

Government of the United States of America - Office of Federal Housing Enterprise Oversight ( email )

1700 G Street NW
Washington, DC 20552
United States

Anthony N. Pennington-Cross

Marquette University - Dept. of Finance ( email )

P.O. Box 1881
Milwaukee, WI 53201-1881
United States

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