Abstract
A mortgage borrower has several options once a foreclosure proceedings is initiated, mainly default and prepayment. Using a sample of FHA mortgage loans, we develop a dependent competing risks framework to examine the determinants of time to default and time to prepayment once the foreclosure proceedings is initiated. More importantly, we examine the interdependence between default and prepayment, through both the correlation of the unobserved heterogeneity terms and the preventive behavior of the individual mortgage borrowers. We find that time to default and time to prepayment are affected by several factors, such as the Loan-To-Value ratio (LTV), FICO score and unemployment rate. In addition, we find strong evidence that supports the existence of interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms and the preventive behavior of individual mortgage borrowers. We show that neglecting the interdependence through the preventive behavior of the individual mortgage borrowers can lead to biased estimates and misleading inference.
Highlights
A mortgage borrower is technically delinquent once a monthly mortgage payment due date is missed
We specify a dependent competing risks framework to examine the interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms associated with each risk and the preventive behavior of individual mortgage borrowers
Using a panel data of Federal Housing Administration (FHA) mortgage loans, we specify a dependent competing risks framework to examine the determinants of the default and prepayment hazards once the foreclosure proceedings is initiated
Summary
A mortgage borrower is technically delinquent once a monthly mortgage payment due date is missed. The works in Deng et al (2000) and Pennington-Cross (2006) use a competing risks model, where they account for one possible type of interdependence between the default and prepayment hazards This was through the correlation of associated unobserved heterogeneity terms for the purpose of capturing the unobservable loan-specific characteristics (such as the effect of borrowers’ intentions and strategies) that affect both default and prepayment hazards. We specify a dependent competing risks framework to examine the interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms associated with each risk and the preventive behavior of individual mortgage borrowers.
Sign-in/Register to view highlights & summary 
Published Version (
Free)
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
