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The term mortgage credit is shorthand for residential mortgage credit risk – the risk that
a homeowner will default on their mortgage and the lender of mortgage funds will not be
able to fully recover their principal. The heart of mortgage credit analysis thus revolves
around understanding what causes mortgage default and how much of the loaned
principal one could hope to recover if default were to happen. The goal of this primer is
to provide the foundational blocks for such analysis.
We begin with a discussion of mortgage delinquency, a crucial stepping stone on the
path to default. We describe commonly used metrics for tracking the degree of mortgage
delinquency in a pool of mortgages and discuss the various causes of delinquency.
The progression from delinquency to foreclosure is not pre-ordained and, in practice, the
mortgage servicer will do their utmost to avoid the outcome of foreclosure since the
associated costs (economic and non-economic) can be substantial. Thus, the section on
loss mitigation describes the various alternatives to foreclosure that servicers pursue in
order to get the borrower back on track, or failing that, to minimize the losses they incur.
When loss mitigation activities are ineffective or the borrower is unwilling to work with
the servicer, foreclosure becomes inevitable. We explain the distinction between
mortgage default and mortgage foreclosure and walk through some of the intricacies of
the foreclosure process. The institutional details of the process are supplemented with a
broad overview of the economic determinants of mortgage default.
Understanding the economic determinants of delinquency and default constitute the
foundation for putting together a model of default. We describe the mathematical
structure of a typical model and describe how it can be used to forecast voluntary
prepayments and defaults.
The main body of our primer concludes with addressing the crucial issue of determining
what fraction of the principal we should expect to lose on a defaulted loan (loss severity).
We describe the components of loss severity and illustrate how it varies as a function of
the economic environment and the characteristics of the mortgage loan.
There are a number of appendices to the primer which take a deep-dive into issues that
cannot be easily covered in the main body of the primer without a break in continuity.
The appendices review the conventions for delinquency calculations, the causes of
seasonal trends in delinquency, monitoring the impact of mortgage servicing on credit
performance, state-level variation in foreclosure law, the significance of junior
mortgages in foreclosure proceedings, personal bankruptcy, and the taxation of mortgage
defaults.
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[此贴子已经被作者于2009-2-14 11:23:03编辑过]
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