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Extended Loan Terms and Auto Loan Default Risk
A salient feature of the $1.2 trillion auto-loan market is the extension of loan maturity terms in recentyears. Using a large, national sample of auto loans from the entire auto market, we find that the default rates on six- and seven-year loans are multiple times that of shorter five-year term loans. Most of the default risk difference is due to borrower risks associated with longer-term loans, as those longer-term auto borrowers are more credit and liquidity constrained. We also find borrowers’ loan-term choice to be endogenous and that the endogeneity bias is substantial in conventional ...
REGIME SHIFT AND THE POST-CRISIS WORLD OF MORTGAGE LOSS SEVERITIES
The average loss rate for conventional mortgages rose from less than 10% pre-crisis to more than 30% during the crisis, reaching and sustaining greater than 40% post-crisis. Using a novel database that contains the components of mortgage losses, we identify a regime shift in loss severities caused by various government interventions and changes in business practices in the servicing industry. This regime shift helps explain the persistently high loss severities post-crisis, even after a strong recovery in the housing market. Our findings have implications for loss modeling, pricing, and, ...
Mortgage Loss Severities: What Keeps Them So High?
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 ...