Securitization of Subprime Mortgage Credit

B. RosenR. Tsai

Table of Contents

• Summary of empirical research by Yuliya Demyank (St. Louis Fed) and Otto Van Hemert (NYU Stern) – Dec 2008

• Analysis of Bloomberg Data

Empirical Research by Demyank and Van Hemert

“Understanding the Subprime Mortgage Crisis”

via Social Science Research Network

Demyank, Van Hemert approach

• “What do the data tell us about the possible causes of the 2007 subprime mortgage crisis?”

• Used loan-level database containing info on ½ of all mortgages originated between 2001 and 2007

2006 and 2007 vintages performed worst

• Delinquencies are 60 days past due, in foreclosure, bank-owned, defaulted• Adjusted rate accounts for differences in FICO, Loan To Value, Debt to Income

and other variables

06-07: All loan types suffered

• Conventional wisdom said only hybrid or low-documentation loans performed badly

• Not true! Fixed rate and full documentation loans also showed substantially higher delinquency rates

Most important variables

• Most important macroeconomic factor was subsequent house price appreciation (at MSA) level)documentation loans performed badly

• For empirical analysis, we run a proportional odds duration model with the probability of (first-time) delinquency a function of these factors and loan age.

Background on proportional odds (ordered logit)

• Y is cumulative default rate, x is vector of variables (loan to value, FICO, house price appreciation, loan age)

• Beta is vector of regression coefficients

Five findings• Quantified determinants of 2006 and 2007 loans• Showed declining loan quality (loan performance

adjusted for borrower, macro variables)• Was possible to detect loan deterioration ahead

of time with simple statistical tests• Securitizers knew of deterioration, changing

determinants of mortgage rates• Higher likelihood of delinquencies in low- middle-

income areas (negative byproduct of Community Reinvestment Act, GSEs)

Subprime loan characteristics

Actual Delinquency Rate

Determinants

Determinants

Determinants

Analysis of Bloomberg Data

Yield to Maturity Analysis

Collateral Composition

Collateral Composition

Collateral Composition

Collateral Composition

Loss Coverage

Delinquency

Liquidated & Prepaid Loans

Scenario Analysis ($65)

Scenario Analysis ($75)