title: Three essays on residential mortgage defaults, loan modifications and post-default outcomes
Creators: name: Ventura, Chiara Maria
Publisher: name: University of Reading
Year: 2024

description: Residential mortgages represent a crucial segment within the financial and lending industry across major economies. Their significance stems primarily from the market’s
size, a result of the combination of substantial loan amounts and widespread presence
in the consumer credit sector. Consequently, residential mortgages constitute a significant proportion of the assets managed by financial institutions. In addition, this
type of loans is central to numerous policy and governmental initiatives, reflecting the
importance of the underlying collateral for a substantial number of citizens in most
developed countries. Lastly, given their pivotal role, residential mortgages have been
at the heart of various crises over the years and continue to be closely monitored due
to their critical importance in contributing to overall financial stability.
A substantial corpus of academic literature emerged following the Global Financial
Crisis, exploring various dimensions of mortgage financing, including its relationship
with the broader economy, and the events and market disruptions that caused the
collapse of this sector. Nevertheless, as the crisis gradually receded, certain pivotal
questions and research areas have seen diminished interest, overshadowed by other
subjects. This Thesis aims to enrich the existing body of literature by offering new
insights into two significant aspects of residential mortgages that remain pertinent
today, despite receiving scant attention in recent years. The first research domain focuses on correlation; the second investigates mortgage dynamics in response to specific
lifecycle events, such as modification and default.
Correlation plays a crucial role in determining both regulatory and economic capital,
as it quantifies the interconnectedness of loans within the same asset class. Hence, the
precision of the correlation parameter is vital for accurate risk assessment and management. Within the regulatory framework, the Basel Committee on Banking Supervision
(BCBS) has set the correlation for residential mortgages at a fixed value of 15%. Although this value is deemed to be sufficiently conservative, there is limited evidence
supporting its flat nature. This research primarily seeks to ascertain the validity of
this assumption by investigating the presence of significant variations in default correlation across different segments of the residential mortgage market. Moreover, the
study examines the impact of correlation on lenders’ loan pricing strategies and questions whether current regulation implicitly encourages regulatory capital arbitrage.
Throughout the lifetime of a mortgage, various events can alter the standard repayment trajectory, which in turn has significant implications for lenders, borrowers, and
stakeholders. The second and third empirical chapters of this Thesis analyse the
determinants that characterise mortgage resolutions following loan modification and
default, respectively. Specifically, this Thesis enhances existing research by examining
how policy changes and mortgage market breaks have impacted consumers behaviour
after the occurrence of these events. In particular, the second empirical study analyses
the outcomes of post-modification and its determinants following the cessation of the
Home Affordable Modification Program (HAMP), implemented by the US government
to address the escalating defaults triggered by the Global Financial Crisis. Conversely,
the third empirical chapter examines post-default resolutions and their determinants
across three periods: before, during, and after the crisis.
This study utilises mortgages originated in the United States by the Federal Home Loan
Mortgage Corporation (Freddie Mac). The data under examination encompasses over
20 years and offers a nationwide scope, thereby providing a novel viewpoint within the
existing literature, which has predominantly focused on either sub-prime portfolios or
state-specific mortgages.