Document Type

Government Document

Language

eng

Publication Date

6-3-2003

Publisher

Federal Housing Finance Agency

Source Publication

Office of Federal Housing Enterprise Oversight: Working Papers

Abstract

This paper links the probabilities of default and prepayments to the distribution of losses associated with a synthetic portfolio of Fannie Mae and Freddie Mac mortgages randomly samples from 30 year fixed rate prime and subprime mortgages. The simulations exploit historical relationships found between mortgage characteristics and economic conditions in time and space as estimated in a competing risk conditional default and prepayment hazard model and a loss given default model. Estimations of loss distributions indicate that subprime loans exhibit greater dispersion and higher loss rates than prime loans. For instance, expected or mean simulated losses for subprime loans are found to be 5 to 6 times higher than for prime loans. However, the use of simple risk sharing arrangements can greatly mitigate expected losses and reduce the variation of losses.

Comments

Disclaimer: OFHEO Working Papers are preliminary products circulated to stimulate discussion and critical comment. The analysis and conclusions are those of the authors and do not imply concurrence by other staff of the Office of Federal Housing Enterprise Oversight or its Director. References to OFHEO Working Papers (other than acknowledgement by a writer that he or she has had access to such unpublished material) should be cleared with the author to protect the tentative character of these papers.

Published version. Pennington-Cross, Anthony. OFHEO WORKING PAPERS, WORKING PAPER 03-1, Subprime & Prime Mortgages: Loss Distributions. OFHEO. Washington, DC: Department of Housing and Urban Development, 2003. Publisher link.

This document is in the public domain.

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