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Local Housing Market Cycle and Loss Given Default :, Evidence from Sub-Prime Residential Mortgages, Yanan Zhang, Lu Ji, Fei Liu

This paper studies the impact of housing market cycles on loss given default (LGD). Previous studies have shown that the current loan-to-value ratio (CLTV) is the most important determinant of LGD. This paper establishes another linkage which is between the house price cycles before the time of mortgage origination and LGD. The empirical analysis is based on a large loan-level sub-prime residential mortgage loss dataset from 1998 to 2009. Results show that house price history has a long memory in explaining LGD. Its explanatory power far exceeds the original LTV and other loan characteristics. This paper offers a countercyclical view of LGD risk. The model can be combined with a default probability model to serve as a regulatory prudential tool. Such a tool provides a solution to the inherent procyclical bias in BASEL II capital requirements, and can contribute to the safety and soundness of banking institutions
Table Of Contents
Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Data; A. Borrowers Characteristics; B. Property Characteristics; C. Loan Characteristics; D. Housing Market Cycle Information; E. Geographical Differences in LGD; III. Empirical Study; A. Model; B. Results; C. A summary by determinant categories; D. Variable-by-variable results; E. The effect of the housing market cycle; IV. Sensitivity Analysis and Robustness Checks; V. Simulation Study and Policy Analysis; A. Countercyclical prudential tool; B. Lukewarm House Price Scenario; C. Big Boom Scenario; D. Big Bust Scenario
Literary Form
non fiction
"July 2010."
Physical Description
1 online resource (41 p.)
Specific Material Designation
Form Of Item

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