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The Journal of Structured Finance

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Did the U.S. Housing Crisis Start in 2003? The Impact of Borrower Subsequent Debt

Jiawei “David” Zhang and Hua “Tony” Tang
The Journal of Structured Finance Fall 2017, 23 (3) 100-107; DOI: https://doi.org/10.3905/jsf.2017.23.3.100
Jiawei “David” Zhang
is the managing director and head of securitized product research at MSCI in New York, NY
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Hua “Tony” Tang
is an executive director at TIG Advisors in New York, NY
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Abstract

This article examines two apparent anomalies concerning the credit performance of conforming mortgage loans. First, the 2003–2004 loan vintage displayed high default rates, even though it suffered little home price depreciation. Second, the refinance loans from the 2006–2007 vintage displayed markedly higher default rates than contemporaneous purchase-money loans. Based on an analysis of credit bureau data, the authors conclude that subsequent debt fully explains the default performance of the 2003–2004 vintage but not of the 2006–2007 vintage. The authors suggest that appraisal bias may account for higher default rates on loans in the latter vintage. The article proposes the use of a vintage-based subsequent debt risk index to augment mortgage credit risk management for market participants as well as policymakers.

TOPICS: MBS and residential mortgage loans, credit risk management

  • © 2017 Pageant Media Ltd
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The Journal of Structured Finance: 23 (3)
The Journal of Structured Finance
Vol. 23, Issue 3
Fall 2017
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Did the U.S. Housing Crisis Start in 2003? The Impact of Borrower Subsequent Debt
Jiawei “David” Zhang, Hua “Tony” Tang
The Journal of Structured Finance Oct 2017, 23 (3) 100-107; DOI: 10.3905/jsf.2017.23.3.100

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Did the U.S. Housing Crisis Start in 2003? The Impact of Borrower Subsequent Debt
Jiawei “David” Zhang, Hua “Tony” Tang
The Journal of Structured Finance Oct 2017, 23 (3) 100-107; DOI: 10.3905/jsf.2017.23.3.100
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  • Article
    • Abstract
    • CREDIT BUREAU DATA: BORROWERS OVERALL AND EVOLVING BALANCE SHEET
    • PRE-BUBBLE VINTAGES’ HIGH DEFAULT RATES ARE CAUSED BY BORROWERS’ SUBSEQUENT DEBT
    • SUBSEQUENT DEBT DOES NOT EXPLAIN PERFORMANCE OF BUBBLE VINTAGE REFINANCE LOANS; APPRAISAL BIAS MAY BE THE CAUSE
    • BORROWERS’ EXCESS LEVERAGE WAS A KEY DRIVER OF HOUSING CRISIS
    • IMPLICATIONS FOR MORTGAGE CREDIT RISK MODELING
    • APPENDIX
    • ENDNOTES
    • REFERENCES
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