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FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks

by Ran Deng and Shermineh Haghani *,†
Office of the Comptroller of the Currency, 400 7th Street S.W., Washington, DC 20219, USA
*
Author to whom correspondence should be addressed.
The views in this paper are those of the authors and do not necessarily reflect those of the Office of the Comptroller of the Currency or the Department of Treasury.
J. Risk Financial Manag. 2018, 11(1), 2; https://doi.org/10.3390/jrfm11010002
Received: 31 October 2017 / Revised: 15 December 2017 / Accepted: 18 December 2017 / Published: 28 December 2017
(This article belongs to the Special Issue Applied Econometrics)
A mortgage borrower has several options once a foreclosure proceedings is initiated, mainly default and prepayment. Using a sample of FHA mortgage loans, we develop a dependent competing risks framework to examine the determinants of time to default and time to prepayment once the foreclosure proceedings is initiated. More importantly, we examine the interdependence between default and prepayment, through both the correlation of the unobserved heterogeneity terms and the preventive behavior of the individual mortgage borrowers. We find that time to default and time to prepayment are affected by several factors, such as the Loan-To-Value ratio (LTV), FICO score and unemployment rate. In addition, we find strong evidence that supports the existence of interdependence between the default and prepayment hazards through both the correlation of the unobserved heterogeneity terms and the preventive behavior of individual mortgage borrowers. We show that neglecting the interdependence through the preventive behavior of the individual mortgage borrowers can lead to biased estimates and misleading inference. View Full-Text
Keywords: FHA loan; home mortgage; foreclosure; default and prepayment; unobserved heterogeneity; duration models; competing risks FHA loan; home mortgage; foreclosure; default and prepayment; unobserved heterogeneity; duration models; competing risks
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Deng, R.; Haghani, S. FHA Loans in Foreclosure Proceedings: Distinguishing Sources of Interdependence in Competing Risks. J. Risk Financial Manag. 2018, 11, 2.

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