Subprime Transitions: Lingering or Malingering in Default?

Posted: 18 May 2006

See all articles by Dennis R. Capozza

Dennis R. Capozza

Ross School of Business, University of Michigan

Thomas A. Thomson

UTSA College of Business


When a mortgage borrower becomes seriously delinquent (i.e., defaults), the lender initiates a time consuming and complex recovery process that may or may not result in foreclosure and eventual disposition of the real estate collateral (REO). This research studies this transition process for a unique sample of subprime mortgages that were seriously delinquent on September 30, 2001. Eight months later, possible states for the delinquent loans, in order, are a) to remain delinquent without deteriorating further, 2) foreclosure, 3) worsen, i.e., become more months delinquent, 4) bankruptcy and 5) cure. The data indicate that, relative to prime loans, when subprime loans becomes seriously delinquent (90 days or longer) they are about twice as likely to become REO but take about four times longer to get there. It is unusual for a subprime defaults to be cured suggesting considerable forbearance by subprime lenders. We explore determinants of the transition probabilities and find that the most economically important predictors of transition from default to any other state are the number of payments the borrower has made and the loan to value ratio.

Keywords: subprime, mortgages, defaults, losses, lending

Suggested Citation

Capozza, Dennis R. and Thomson, Thomas A., Subprime Transitions: Lingering or Malingering in Default?. Journal of Real Estate Finance and Economics, Forthcoming, Available at SSRN:

Dennis R. Capozza (Contact Author)

Ross School of Business, University of Michigan ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734 995 7271 (Phone)
734 629-0635 (Fax)

Thomas A. Thomson

UTSA College of Business ( email )

Real Estate Finance and Development Program
One UTSA Circle
San Antonio, TX 78249-0637
United States
210-458-5306 (Phone)
210-458-6320 (Fax)


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