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Federal Reserve Bank of Philadelphia
Working Papers
Mortgage Loss Severities: What Keeps Them So High?
Xudong An
Lawrence R. Cordell

Mortgage loss-given-default (LGD) increased significantly when house prices plummeted and delinquencies rose during the financial crisis, but it has remained over 40 percent in recent years despite a strong housing recovery. Our results indicate that the sustained high LGDs post-crisis are due to a combination of an overhang of crisis-era foreclosures and prolonged foreclosure timelines, which have offset higher sales recoveries. Simulations show that cutting foreclosure timelines by one year would cause LGD to decrease by 5–8 percentage points, depending on the trade-off between lower liquidation expenses and lower sales recoveries. Using difference-in-differences tests, we also find that recent consumer protection programs have extended foreclosure timelines and increased loss severities in spite of their benefits of increasing loan modifications and enhancing consumer protections.

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Xudong An & Lawrence R. Cordell, Mortgage Loss Severities: What Keeps Them So High?, Federal Reserve Bank of Philadelphia, Working Papers 19-19, 19 Mar 2019.
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Keywords: loss-given default (LGD); foreclosure timelines; regulatory changes; Heckman two-stage correction; accelerated failure time model
DOI: 10.21799/frbp.wp.2019.19
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