Optimal Stopping and Losses on Subprime Mortgages

Dennis Capozza and Thomas Thomson

The Journal of Real Estate Finance and Economics, 2004, vol. 30, issue 2, 115-131

Abstract: Lender losses on mortgage loans arise from a two-stage process. In the first stage, the borrower stops making payments if and when default is optimal. The second stage is a lengthy and costly period during which the lender employs legal remedies to obtain possession and execute a sale of the collateral. This research uses data on subprime mortgage losses to explore the role of borrower and collateral characteristics, and local legal requirements, as well as traditional option variables in the decisions of borrowers and lenders. Although subprime borrowers default earlier, which should reduce lender losses, these borrowers, nevertheless, impose greater realized losses on mortgage lenders. Copyright Springer Science + Business Media, Inc. 2004

Keywords: subprime; mortgages; defaults; losses; lending (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (6)

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DOI: 10.1007/s11146-004-4875-z

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