A prudent loss given default estimation for mortgages. II

Bogie Ozdemir and Emma Huang

Journal of Risk Model Validation

Abstract: When the possibility of another house price correction continues to be a concern, it is important to accurately estimate loss given default (LGD) for mortgage portfolios and be able to stress test those portfolios effectively. In this paper we introduce a prudent methodology to do so. The methodology builds on the earlier Journal of Risk Model Validation paper by Ozdemir, which provides an accurate estimation of “workout†LGD by directly modeling the house value at default by incorporating market effects and potential appraisal biases. Improving on it, in this extension the probability of “curing†and the probability of full payment after default (“exit†) are explicitly modeled with respect to the inverse of the loan-to-value (LTV) ratio. This makes the LGD estimation more accurate and risk sensitive, and particularly suitable for stress testing purposes. While the methodology is presented in a mortgage setting, it can easily be applied to all types of secured lending where the collateral value relative to exposure at default (ie, the LTV) is likely to influence the potential outcomes following the default.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-risk-model-validat ... ion-for-mortgages-ii (text/html)

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:rsk:journ5:7885046

Access Statistics for this article

More articles in Journal of Risk Model Validation from Journal of Risk Model Validation
Bibliographic data for series maintained by Thomas Paine ().