What homebuyers need to know about the differential risk of mortgages

Authors

  • Larry J. Prather Department of Accounting and Finance, Southeastern Oklahoma State University
  • Che-Chun Lin Department of Quantitative Finance, National Tsing Hua University, Taiwan
  • Ting-Heng Chu Department of Economics and Finance, East Tennessee State University

DOI:

https://doi.org/10.61190/fsr.v22i4.4661

Keywords:

Mortgage products, Default risk, Home mortgages

Abstract

Because homeownership represents the largest investment many individuals make, and the credit risks of competing mortgage products are not well understood, we develop a framework to quantify absolute and relative credit risks of mortgage products. We use simulations to examine the default rates of five types of mortgage products under both a normal and stressed economy to examine relative risk differences among the competing mortgage products. Results suggest that some mortgage products have a default risk four times larger than fixed-rate loans and default probabilities of 30% in a stressed economy. As a result, homebuyers should consider the credit risk of competing mortgage products before selecting a mortgage.

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Published

2013-12-31

How to Cite

Prather, L. J., Lin, C.-C., & Chu, T.-H. (2013). What homebuyers need to know about the differential risk of mortgages. Financial Services Review, 22(4), 331–347. https://doi.org/10.61190/fsr.v22i4.4661

Issue

Vol. 22 No. 4 (2013): FSR Winter 2013

Section

New Original Submission

License

Copyright (c) 2013 Academy of Financial Services

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