The Dynamics of Subprime Adjustable-Rate Mortgage Default: A Structural Estimation

You Suk Kim, Wenli Li and Hanming Fang
Additional contact information
You Suk Kim: Federal Reserve Board
Wenli Li: Federal Reserve Bank of Philadelphia

No 400, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: We present a dynamic model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account delinquency consequences from lenders. We implement the model using data that contain information on borrowers' payment history, broad balance sheets, and lender responses. Our investigation reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, neither interest rate resets nor the housing or labor market conditions were as important in borrowers' delinquency decisions as in their payoff decisions. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to high delinquency rates. Counterfactual policy simulations reveal that even if the benchmark interest rate could be lowered to zero, it would have a limited effect on reducing the delinquency rates. We find that automatic modification mortgages with cushions, under which payment reductions are triggered only when housing price declines exceed a threshold, may result in a Pareto improvement, in that borrowers and lenders are better offthan under the baseline. Our counterfactual analysis also suggests that lenders' limited commitment power regarding loan modification policies may be an important reason for the relatively low rate of modifications observed during the housing crisis.

Date: 2016
References: Add references at CitEc
Citations: View citations in EconPapers (3)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: The dynamics of subprime adjustable-rate mortgage default: a structural estimation (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:400

Access Statistics for this paper

More papers in 2016 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().