Time in deliquency: implications for mortgage lending and MBS

Delinquency risk is often ignored in recent mortgage-related literature. However, it is postulated to be of sufficient influence to the yields of mortgages and the corresponding mortgage-backed securities (MBS) to warrant concern from mortgage lenders and issuers/underwriters of MBS. This paper provides the a rigorous analysis of the delinquency risk of residential adjustable mortgages (ARMs) by utilizing the time in delinquency from delinquency in addition to the conventional delinquency incidence measure. Utilizing the Poisson and negative binomial models on 684 mortgage observations from 1980 to 1999, it is found that uncontrollable environmental factors are essentially responsible for delinquency incidence. However, controllable factors such as occupation of borrower, mortgage term and whether the loan consists of an initial preferential rate period are influential in determining the time in delinquency, if this situation arises. The implication is that although mortgage lenders and MBS underwriters may find that delinquency risk is largely dependent on macroeconomic trends, it may be possible to control and minimize the time in delinquency or the time before reinstatement when delinquency occurred. This is useful in reducing potential losses from default/foreclosure, as, although delinquent borrowers may not have default in mind when they initially miss an instalment, they may find default inevitable if the missed payments were to be allowed to accumulate. [PUBLICATION ABSTRACT]