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Loss Given Default of High Loan-to-Value Residential Mortgages

by Min Qi and Xiaolong Yang

Abstract:  This paper studies residential mortgage loss given default using a large set of historical loan-level default and recovery data of high loan-to-value mortgages from several private mortgage insurance companies. We show that loss given default can largely be explained by various characteristics associated with the loan, the underlying property, and the default, foreclosure, and settlement process. We find that the current loan-to-value ratio is the single most important determinant. More importantly, mortgage loss severity in distressed housing markets is significantly higher than under normal housing market conditions. Our empirical results have important policy implications for risk-based capital.

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Any whole or partial reproduction of material in this paper should include the following citation: Min Qi and Xiaolong Yang, ; "Loss Given Default of High Loan-to-Value Residential Mortgages," Office of the Comptroller of the Currency; Working Paper 2007-4, June 2007

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