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Loss Severity on Residential Mortgages: Evidence from Freddie Mac’s Newest Data

Laurie S. Goodman and Jun Zhu
The Journal of Fixed Income Fall 2015, 25 (2) 48-57; DOI: https://doi.org/10.3905/jfi.2015.25.2.048
Laurie S. Goodman
is the center director for the Housing Finance Policy Center at the Urban Institute in Washington, DC.
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  • For correspondence: lgoodman@urban.org
Jun Zhu
is a senior financial methodologist for the Housing Finance Policy Center at the Urban Institute in Washington, DC.
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  • For correspondence: jzhu@urban.org
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Abstract

In this article, we analyze new loan-level data recently released by Freddie Mac on more than 17 million single-family mortgages to reveal a range of new and useful insights into the ultimate financial losses associated with a loan after it experiences a credit event. We conclude that mortgage insurance significantly lowers loss severities. We show that actual loss severities are higher than the preset severity schedule for loans with a loan-to-value (LTV) ratio of 60–80, relatively accurate for higher-LTV loans. We also find that small loans have higher severity than larger loans, that real-estate-owned (REO) sales have higher severity than short sales, and that there is no stable relationship between the state of origination and severity. Finally, we review the components of loss—liquidation value, direct expenses, and lost interest—and find that direct expenses and loss interest contribute significantly to the ultimate loss.

TOPICS: MBS and residential mortgage loans, credit risk management

  • Copyright © 2015 Urban Institute. All rights reserved. Not to be reproduced or redistributed without permission.
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The Journal of Fixed Income: 25 (2)
The Journal of Fixed Income
Vol. 25, Issue 2
Fall 2015
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Loss Severity on Residential Mortgages: Evidence from Freddie Mac’s Newest Data
Laurie S. Goodman, Jun Zhu
The Journal of Fixed Income Sep 2015, 25 (2) 48-57; DOI: 10.3905/jfi.2015.25.2.048

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Loss Severity on Residential Mortgages: Evidence from Freddie Mac’s Newest Data
Laurie S. Goodman, Jun Zhu
The Journal of Fixed Income Sep 2015, 25 (2) 48-57; DOI: 10.3905/jfi.2015.25.2.048
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  • Article
    • Abstract
    • WHAT DO THE NEW DATA INCLUDE?
    • WHAT HAPPENS TO LOANS THAT EXPERIENCE A CREDIT EVENT?
    • COMPARISON OF LOSS SEVERITIES TO PRESET SEVERITIES IN THE STRUCTURED AGENCY CREDIT RISK DEALS
    • A DEEPER ANALYSIS OF LOSS SEVERITIES
    • AN ANALYSIS OF THE COMPONENTS OF LOSS
    • CONCLUSION
    • ENDNOTES
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