Managing Mortgage Credit Risk: What Went Wrong With the Subprime and Alt-A Markets?

Man Cho ()
Additional contact information
Man Cho: The KDI School of Public Policy and Management

International Real Estate Review, 2009, vol. 12, issue 3, 295-324

Abstract: The purpose of this study is two-fold: first, to explain the demise of subprime and Alt-A mortgage markets in the U.S. from the viewpoint of measuring and managing mortgage credit risk; and secondly, to discuss several policy lessons that can be learned from the market meltdown. To that end, three tiers of mortgage credit models are elaborated, including the scoring (or risk rank-ordering), risk-based pricing, and ¡§sizing¡¨ (or the analytics used in determining subordination levels of credit- sensitive mortgage backed security (MBS) deals) models. Using these as conceptual underpinning, empirical evidence is surveyed to document key contributing factors to the market demise. Those that are identified include the non-availability of reliable mortgage performance data, lack of theory as well as industry best-practices in performing simulation-based mortgage risk assessments, complex and arcane structures of mortgage backed securities, and information asymmetry among the parties involved in the security transactions. The overall conclusion derived is that the participants to these market segments surpass their risk management capabilities in globalizing funding for subprime and Alt-A mortgages. The policy lessons emphasized are the importance of the infrastructure of proper risk assessment and risk-based pricing, as well as prudent and transparent MBS products along with periodic information disclosure.

Keywords: Subprime mortgage; Mortgage-backed securities; Mortgage default; Credit risk management (search for similar items in EconPapers)
JEL-codes: L85 (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.gssinst.org/irer/wp-content/uploads/20 ... gage-credit-risk.pdf Full text (application/pdf)

Related works:
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:ire:issued:v:12:n:03:2009:p:295-324

Ordering information: This journal article can be ordered from
Global Social Science Institute, 9200 Corporate Blvd., Suite 420 Rockville, MD 20850
https://www.gssinst.org/gssinst/index.html

Access Statistics for this article

International Real Estate Review is currently edited by Professor Sing Tien Foo and Professor Ko Wang

More articles in International Real Estate Review from Global Social Science Institute Global Social Science Institute, 9200 Corporate Blvd., Suite 420 Rockville, MD 20850.
Bibliographic data for series maintained by IRER Graduate Assistant/Webmaster ().