Discontinuity in Relative Credit Losses

Download or read book Discontinuity in Relative Credit Losses written by Agata Lozinskaia and published by . This book was released on 2016 with total page 24 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the distribution of relative credit losses given mortgage default for loans provided by a major government-sponsored creditor in a local area. We use borrower's individual and loan-level data on residential mortgages originated in the period 2008-2012. Our numerical analysis indicates that mortgages bunching at certain Loan-to-Value ratios (LTV) led to a discontinuity in relative credit loss given mortgage default. Through regression analysis, we demonstrate discrete jumps in the approximated historical credit losses generated by loans with a high LTV ratios and find thresholds allowing the segmentation of loans according their credit risk. In addition, our results suggest that mortgage insurance is a potentially valuable instrument for compensation for expected loss in certain risk segments.