Home equity, home value, and determinants of mortgage defaults during the credit crisis

Abstract

We evaluate the relative importance of loan and borrower characteristics at origination, changes in home equity, and potential errors in appraisal values in explaining the probability of a borrower's decision to default. We estimate multinomial logistic models of default and prepayment using loan-level data for more than 3 million subprime mortgage loans originated between 2005 and 2007. We find that 44.8% of subprime borrowers were underwater by April 2011, that original credit attributes and potential appraisal errors had small effects on a borrower's probability of default, and that changes in home equity had the largest effect on a borrower's probability of default.