Self-Selection of Mortgage Contracts and Default Behaviors : Do Mortgagors Choose Mortgage Contracts to Minimize Default Risks of Lenders?
Mortgage underwriting process that sorts heterogeneous borrowers into different risk groups according to observable characteristics of borrowers does not reveal sufficient information to segregate pooling risks in mortgages. Do borrowers always choose rationally mortgage contracts that minimize the mortgage default risks? Why do they want to minimize the lenders default risks, when the mortgage risk premiums are priced upfront based on their observable characteristics? Subject to the upper bound of the loan-to-value (LTV) ratio, prime borrower self-select, in some instances, fixed-rate mortgages (FRMs) over adjustable rate mortgage (ARMs) to maximize their housing utility function. The interaction of borrower characteristics and mortgage choice decision reveals useful information of risk characteristics of borrowers, and improves the predictability of the default probability of the conventional proportional hazard risk models. This study develops a lifetime utility models to represent borrowers mortgage selection behavior that maximizes their utilities in the consumption of housing and non-housing services. We also test empirically using the Heckmans two-step self-selection methodology jointly with proportional hazard model, and find that borrowers self selection decisions reveal true signals of the default risks embedded in LTV and other observable characteristics of the borrowers. Key words: Heterogeneous borrower characteristics, mortgage type, lifetime utility maximization, self-selection, mortgage choice and mortgage default risks
Year of publication: |
2010
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Authors: | Sing, Tien Foo |
Other Persons: | Bo, Liu (contributor) |
Publisher: |
[2010]: [S.l.] : SSRN |
Subject: | Hypothek | Mortgage | Kreditrisiko | Credit risk | Theorie | Theory | Insolvenz | Insolvency | Vertrag | Contract |
Description of contents: | Abstract [papers.ssrn.com] |
Saved in:
Extent: | 1 Online-Ressource |
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Series: | |
Type of publication: | Book / Working Paper |
Language: | English |
Notes: | Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments November 29, 2010 erstellt Volltext nicht verfügbar |
Classification: | L1 - Market Structure, Firm Strategy, and Market Performance |
Source: | ECONIS - Online Catalogue of the ZBW |
Persistent link: https://www.econbiz.de/10013135568
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