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FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks

Ran Deng () and Shermineh Haghani ()
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Ran Deng: Office of the Comptroller of the Currency, 400 7th Street S.W., Washington, DC 20219, USA
Shermineh Haghani: Office of the Comptroller of the Currency, 400 7th Street S.W., Washington, DC 20219, USA

Journal of Risk and Financial Management, 2017, vol. 11, issue 1, 1-15

Abstract: A mortgage borrower has several options once a foreclosure proceedings is initiated, mainly default and prepayment. Using a sample of FHA mortgage loans, we develop a dependent competing risks framework to examine the determinants of time to default and time to prepayment once the foreclosure proceedings is initiated. More importantly, we examine the interdependence between default and prepayment, through both the correlation of the unobserved heterogeneity terms and the preventive behavior of the individual mortgage borrowers. We find that time to default and time to prepayment are affected by several factors, such as the Loan-To-Value ratio (LTV), FICO score and unemployment rate. In addition, we find strong evidence that supports the existence of interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms and the preventive behavior of individual mortgage borrowers. We show that neglecting the interdependence through the preventive behavior of the individual mortgage borrowers can lead to biased estimates and misleading inference.

Keywords: FHA loan; home mortgage; foreclosure; default and prepayment; unobserved heterogeneity; duration models; competing risks (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2017
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