Mortgage loss severities: What keeps them so high?

Xudong An and Larry Cordell

Real Estate Economics, 2021, vol. 49, issue 3, 809-842

Abstract: Mortgage loss‐given‐default (LGD) increased significantly when house prices plummeted during the financial crisis; but it has remained over 40% in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs postcrisis is due to a combination of an overhang of crisis‐era foreclosures and prolonged liquidation timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by 1 year would cause LGD to decrease by 5–8 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 potential benefits of increasing loan modifications and enhancing consumer protections.

Date: 2021
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https://doi.org/10.1111/1540-6229.12334

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