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Securitization of Subprime Mortgage Credit. B. Rosen R. Tsai. Table of Contents. Summary of empirical research by Yuliya Demyank (St. Louis Fed) and Otto Van Hemert (NYU Stern) – Dec 2008 Analysis of Bloomberg Data.
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Securitization of Subprime Mortgage Credit B. RosenR. Tsai
Table of Contents • Summary of empirical research by Yuliya Demyank (St. Louis Fed) and Otto Van Hemert (NYU Stern) – Dec 2008 • Analysis of Bloomberg Data
Empirical Research by Demyank and Van Hemert“Understanding the Subprime Mortgage Crisis”via Social Science Research Network
Demyank, Van Hemert approach • “What do the data tell us about the possible causes of the 2007 subprime mortgage crisis?” • Used loan-level database containing info on ½ of all mortgages originated between 2001 and 2007
2006 and 2007 vintages performed worst • Delinquencies are 60 days past due, in foreclosure, bank-owned, defaulted • Adjusted rate accounts for differences in FICO, Loan To Value, Debt to Income and other variables
06-07: All loan types suffered • Conventional wisdom said only hybrid or low-documentation loans performed badly • Not true! Fixed rate and full documentation loans also showed substantially higher delinquency rates
Most important variables • Most important macroeconomic factor was subsequent house price appreciation (at MSA) level)documentation loans performed badly • For empirical analysis, we run a proportional odds duration model with the probability of (first-time) delinquency a function of these factors and loan age.
Background on proportional odds (ordered logit) • Y is cumulative default rate, x is vector of variables (loan to value, FICO, house price appreciation, loan age) • Beta is vector of regression coefficients
Five findings • Quantified determinants of 2006 and 2007 loans • Showed declining loan quality (loan performance adjusted for borrower, macro variables) • Was possible to detect loan deterioration ahead of time with simple statistical tests • Securitizers knew of deterioration, changing determinants of mortgage rates • Higher likelihood of delinquencies in low- middle- income areas (negative byproduct of Community Reinvestment Act, GSEs)
