The Delinquency of Subprime Mortgages
Accepted version. Journal of Economics and Business, Vol. 60, No. 1-2 (January/February 2008): 67-90. DOI. © 2007 Elsevier Inc. Used with permission.
Published under Creative Commons License CC BY-NC-ND 4.0.
Abstract
The lag between the time that a borrower stops making payments on a mortgage and the termination of the loan plays a critical role in the costs borne by both borrower and lender on defaulted loans. While the prior literature uses a multinomial logit approach, statistical tests indicate that we cannot accept the associated assumption of Independence of Irrelevant Alternatives (IIA). Using a nested logit specification our results suggest that the recipe for delinquency involves young loans to low credit score borrowers with low or no documentation in housing markets with moderately volatile and flat or declining nominal house prices.