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Research Seminars & Workshops @ IRES

Professor Fang Hanming

Department of Economics, University of Pennsylvania

The Dynamics of Subprime Adjustable-Rate Mortgage Default: A Structural Estimation


21 June 2016 (Tuesday)


3.00pm - 5.00pm


MRB Seminar Room #3-4


Please click HERE

This event is restricted to NUS Staffs and Students only


We present a dynamic structural model of subprime adjustable-rate mortgage (ARM) borrowers making payment decisions, taking into account possible consequences of different degrees of delinquency from their lenders. We empirically implement the model using unique data sets that contain information on borrowers’ mortgage payment history, their broad balance sheets, and lender responses. Our investigation of the factors that drive borrowers’ decisions reveals that subprime ARMs are not all alike. For loans originated in 2004 and 2005, the interest rate resets associated with ARMs as well as the housing and labor market conditions were not as important in borrowers’ delinquency decisions as in their decisions to pay off their loans. For loans originated in 2006, interest rate resets, housing price declines, and worsening labor market conditions all contributed importantly to their high delinquency rates. Counterfactual policy simulations reveal that even if the London Interbank Offered Rate (LIBOR) could be lowered to zero by aggressive traditional monetary policies, it would have a limited effect on reducing the delinquency rates. We find that automatic modification mortgages with cushions, under which the monthly payment or principal balance reductions are triggered only when housing price declines exceed a certain percentage, may result in a Pareto improvement, in that borrowers and lenders are both made better off than under the baseline, with lower delinquency and foreclosure rates. Our counterfactual analysis also suggests that limited commitment power on the part of the lenders regarding loan modification policies may be an important reason for the relatively low rate of modifications observed during the housing crisis.

About the Speaker

Hanming Fang is Class of 1965 Term Professor of Economics at the University of Pennsylvania and a Research Associate at the National Bureau of Economic Research (NBER) where he is currently also the Acting Director of its Chinese Economy Working Group.
Professor Fang is an applied microeconomist with broad theoretical and empirical interests focusing on public economics. His research covers topics ranging from discrimination, social economics, welfare reform, psychology and economics, to public good provision mechanisms, auctions, health insurance markets and population ageing. His research has been published in American Economic Review, Journal of Political Economy, Journal of Economic Theory, International Economic Review and many other leading journals of economics.
He is currently working on issues related to insurance markets, particularly the interaction between the labour market and the US health insurance reform as well as the interaction between insurance markets, housing markets and population ageing. He also studies issues related to discrimination and affirmative action. He has served as associate editor or co-editor for numerous journals in economics, and currently serves as a co-editor of the International Economic Review.
Professor Fang received his PhD in Economics from the University of Pennsylvania in 2000. Before joining the Penn faculty, he held positions at Yale University and Duke University.

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