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Article
A Dynamic Look at Subprime Loan Performance
Journal of Fixed Income
  • Michelle A. Danis, Securities and Exchange Commission - Washington, D.C.
  • Anthony Pennington-Cross, Marquette University
Document Type
Article
Language
eng
Format of Original
12 p.
Publication Date
6-1-2005
Publisher
Institutional Investor, Inc.
Abstract
Does delinquency have any predictive power for the future performance of a mortgage? Analysis of a sample of subprime mortgages from the Loanperformance database on securitized private-label pool collateral using a two-step estimation procedure to control for the endogeneity of delinquency reveals strong support for the distressed prepayment theory that very delinquent loans are more likely to prepay than to default and that prepayment rates increase substantially as delinquency intensity increases. While delinquency leads predominantly to termination of a loan through prepayment, negative equity leads to termination through default. Does delinquency have any predictive power for the future performance of a mortgage? Analysis of a sample of subprime mortgages from the Loanperformance database on securitized private-label pool collateral using a two-step estimation procedure to control for the endogeneity of delinquency reveals strong support for the distressed prepayment theory that very delinquent loans are more likely to prepay than to default and that prepayment rates increase substantially as delinquency intensity increases. While delinquency leads predominantly to termination of a loan through prepayment, negative equity leads to termination through default.
Comments

Accepted version. Journal of Fixed Income, Vol. 15, No. 1 (June 2005): 28-39. DOI. © Institutional Investor, Inc. 2005. Used with permission.

Anthony Pennington-Cross was affiliated with The Federal Reserve Bank of St. Louis Research Division at the time of publication.

Citation Information
Michelle A. Danis and Anthony Pennington-Cross. "A Dynamic Look at Subprime Loan Performance" Journal of Fixed Income (2005) ISSN: 1059-8596
Available at: http://works.bepress.com/anthony_pennington_cross/8/