Default Probability and Loss Given Default for Home Equity Loans (WP 2014-1)

Abstract

Securitization has been widely assigned blame for contributing to the recent mortgage market meltdown and ensuing financial crisis. In this paper, we sample from the OCC Mortgage Metrics database to develop estimates of default probabilities and loss given default for home equity loans originated during 2004-2008 and tracked from 2008-2012. We are particularly interested in the relationship between loan outcomes and the lender's decision to securitize the asset. Among other innovations, we are able to measure the change in the borrower's credit score over time and the level of documentation used during loan underwriting. Results suggest that securitized home equity loans bear higher default risk and produce greater loss severity than loans held in portfolio by lenders.

Authors

Michael LaCour-Little and Yanan Zhang