Modeling the Performance of FHA-Insured Loans: Borrower Heterogeneity and the Exercise of Mortgage Default and Prepayment Options

摘要

This paper estimates an option-based hazard model to simultaneously assess the competing risks of mortgage default and prepayment. In so doing, the analysis seeks to assess the differential default and prepayment probabilities among higher credit risk FHA mortgage borrowers. The empirical model derives from option theory and employs well-specified proxies for the mortgage put and call options in the default and prepayment equations. Further, given the availability of high quality micro data, the estimating equations control for borrower credit worthiness (credit scores) and other common underwriting variables among the approximately 40 contemporaneous and time-invariant indicators of borrower, loan, and locational risk.