Cover Page; Title Page; Copyright Page; Contents; I. Introduction; II. Data; A. Borrowers Characteristics; B. Property Characteristics; C. Loan Characteristics; D. Housing Market Cycle Information; E. Geographical Differences in LGD; III. Empirical Study; A. Model; B. Results; C. A summary by determinant categories; D. Variable-by-variable results; E. The effect of the housing market cycle; IV. Sensitivity Analysis and Robustness Checks; V. Simulation Study and Policy Analysis; A. Countercyclical prudential tool; B. Lukewarm House Price Scenario; C. Big Boom Scenario; D. Big Bust Scenario
E. Up & Down Cycle ScenarioF. Down & Up Cycle Scenario; G. Summary of All Scenarios; VI. Conclusion; VII. Appendix; References; Footnotes
Summary
This paper studies the impact of housing market cycles on loss given default (LGD). Previous studies have shown that the current loan-to-value ratio (CLTV) is the most important determinant of LGD. This paper establishes another linkage which is between the house price cycles before the time of mortgage origination and LGD. The empirical analysis is based on a large loan-level sub-prime residential mortgage loss dataset from 1998 to 2009. Results show that house price history has a long memory in explaining LGD. Its explanatory power far exceeds the original LTV and other loan characteristics
