Working paper

Liquidity constraints, home equity and residential mortgage losses

6 Jun 2016
DOI

https://doi.org/10.4225/50/583e064eaa6f3
Description

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.

Publication Details
Identifiers: 
DOI: 
10.4225/50/583e064eaa6f3
Published year only: 
2016
10
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