Subprime Loan Default Resolutions: Do They Vary Across Mortgage Products and Borrower Demographic Groups?

This paper examines default outcomes for subprime first lien loans during the recent subprime mortgage boom. It conducts this investigation in two phases. The paper first examines factors associated with pre-foreclosure outcomes for subprime mortgages in default. It then examines factors associated with different outcomes for loans that enter foreclosure. These factors include less understood elements such as mortgage product features and borrower demographics. The analysis is based on detailed loan-level data and employs multinomial logit models in a hazard framework. Results show that default resolutions vary with product features and borrower demographics. Adjustable rate and interest-only mortgages, and loans with low- or no-documentation are more likely to enter foreclosure proceedings, and, once in foreclosure, are more likely to become REO. The existence of junior liens increases the probability of the loan remaining in default. Owner-occupancy is associated with lower likelihood of foreclosure initiation and REO, and greater likelihood of curing default. Additionally, default outcomes are impacted by local legal, economic and housing market conditions, and the equity in the home.