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The Past, Present, And Future Of Subprime Mortgages

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Executive Summary

This paper models the historical default and prepayment behavior for subprime mortgages using data on securitized mortgages originated from 2000 to 2007. It's found that more recently originated subprime loans are more likely to default, well ahead of their first mortgage rate resets, and less likely to prepay (i.e., refinance). This rise in mortgage defaults stems largely from unprecedented declines in house prices, along with slack underwriting and tight credit market conditions. The author estimates a competing hazards model to quantify the effects of (1) house price appreciation, (2) underwriting standards, (3) mortgage rate resets, and (4) household cash flow shocks, such as job loss and oil price increases, on the likelihood of borrowers with subprime mortgages to default or prepay.

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