Liquidity Constraints, Home Equity and Residential Mortgage Losses

Hung Do, Daniel Rösch () and Harald Scheule
Additional contact information
Daniel Rösch: University of Regensburg

The Journal of Real Estate Finance and Economics, 2020, vol. 61, issue 2, No 3, 208-246

Abstract: Abstract This paper analyses how mortgage borrower liquidity constraints and home equity drive the realized loss rates given default using loan-level data. We define defaulted loans with zero loss as cures and those with non-zero loss as non-cures. We find economically that borrower liquidity constraints and positive equity explain cure, while negative equity explains non-zero loss. The findings provide an important economic-rationale for a separation of the cure and loss processes in mortgage loss models and their applications such as loan pricing and bank capital regulation. The results have great relevance for the multi-trillion dollar mortgage industry for a more efficient capital allocation, better mortgage pricing and more forward-looking loan loss provisioning.

Keywords: Cure; Loss Given Default; Liquidity Constraints; Home Equity; Mortgage; Resolution; Selection (search for similar items in EconPapers)
JEL-codes: C19 G21 G28 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://link.springer.com/10.1007/s11146-019-09709-9 Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:jrefec:v:61:y:2020:i:2:d:10.1007_s11146-019-09709-9

Ordering information: This journal article can be ordered from
http://www.springer. ... ce/journal/11146/PS2

DOI: 10.1007/s11146-019-09709-9

Access Statistics for this article

The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

More articles in The Journal of Real Estate Finance and Economics from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().