Securitization of Subprime

Mortgage Credit
B. Rosen
R. 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 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- middleincome 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)