Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 876: Mortgage Loan Characteristics , Unobserved Heterogeneity and the Performance of United Kingdom Securitised Sub-Prime Loans

Gauthier Lanot () and David Leece ()
Additional contact information
Gauthier Lanot: Department of Economics, Umeå School of Business and Economics,, Postal: Umeå University, S 901 87 Umeå, Sweden
David Leece: Keele Management School, Postal: Keele University, United Kingdom

Abstract: The research estimates a competing risk model of mortgage terminations on samples of UK securitised subprime mortgages. Given the argued role of these types of loan in the recent financial crisis then it is important to better understand their performance and supposed idiosyncratic behaviour. The methodological and empirical advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving initial mortgage choices and dynamic selection over time. Moreover, we estimate specific coefficients for this unobserved heterogeneity and determine the correlation between the unobserved components of default and prepayment. The paper demonstrates the need for researchers and practitioners to jointly estimate household choices whiles controlling for selectivity through unobserved heterogeneity.

Keywords: Subprime mortgages; unobserved heterogeneity; household behaviour; loan performance

JEL-codes: C13; C25; C51; D10; D14; E44; G21

44 pages, February 20, 2014

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