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Working paper

Liquidity constraints, home equity and residential mortgage losses

Mortgages Liquidity Housing prices Home equity Australia
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apo-nid67325.pdf 1.78 MB

This paper analyses how borrower liquidity constraints and home equity relate to the realized loss given default (LGD) using the quarterly U.S. residential mortgage loan-level data observed from Q2 2005 to Q1 2015. We define defaulted loans with zero-LGD as cure loans and those with non-zero LGD as non-cure loans. We find robust evidence that the borrower liquidity constraints and positive equity are explaining cure, while negative equity explains non-zero loss.
However, a relationship between borrower liquidity constraints and the non-zero LGD is not economically meaningful. Our findings support to separate cure and non-cure loans in mortgage loss risk models.

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