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Liquidity Constraints, Home Equity and Residential Mortgage Losses

Hung Do, Daniel Rösch () and Harald Scheule
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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: G21 G28 C19 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s11146-019-09709-9

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