A Note on Mortgage Risk: Default vs. Loss Rates

Terrence M. Clauretie

Real Estate Economics, 1990, vol. 18, issue 2, 202-206

Abstract: This note reexamines the role of the loan‐to‐value ratio on mortgage risk. Whereas previous studies have focused on the default rate as a function of this term, this study considers the additional effect on the loss rate of defaulted loans. Because the dollar loss per amount originated is the product of the default rate and the loss rate on defaulted loans, the impact of the loan‐to‐value ratio on both the default and loss rates is crucial to explaining the impact of the loan‐to‐value ratio on mortgage risk. I find that both rates are significantly positively related to loan‐to‐value ratio and that the loss rate accounts for between 13% and 20% of total loan‐to‐value impact.

Date: 1990
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