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Loss given default of residential mortgages in a low LTV regime: Role of foreclosure auction process and housing market cycles

Yun Park () and Doowon Bang ()

Journal of Banking & Finance, 2014, vol. 39, issue C, 192-210

Abstract: Using loan-level foreclosure auction data we study the loss given default (LGD) of defaulted residential mortgages originated in Korea, a low LTV regime. We find that senior mortgages generate very low loss rates (5–10%) while losses of subordinated claims are in 30–50% range. We document the effects of housing market cycles on loss severity by showing that collateral characteristics that are overvalued during the boom increase loss severity during the market downturn. We also investigate how a broad set of time-of-origination and post-origination information on loan, collateral and borrower characteristics and foreclosure auction process influence the LGD of residential mortgages.

Keywords: Foreclosure auction process; Residential mortgages; Loss given default; Low LTV regime; Housing market cycle (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2014
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Handle: RePEc:eee:jbfina:v:39:y:2014:i:c:p:192-210