Abstract
We evaluate the relative importance of loan and borrower characteristics at origination, changes in home equity, and potential errors in appraisal values in explaining the probability of a borrower's decision to default. We estimate multinomial logistic models of default and prepayment using loan-level data for more than 3 million subprime mortgage loans originated between 2005 and 2007. We find that 44.8% of subprime borrowers were underwater by April 2011, that original credit attributes and potential appraisal errors had small effects on a borrower's probability of default, and that changes in home equity had the largest effect on a borrower's probability of default.
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