Abstract
An important instrument to mitigate credit losses is modification of note rates of distressed borrowers. From a logistic model of early default, this article inferred the note rate impact on loan default probabilities, while controlling for loan characteristics (credit quality) and borrower location.
Notes
1To stem subprime foreclosures, on December 2007, US Treasury Secretary announced a selective 5-year freeze on the rates of subprime adjustable-rate mortgages (ARMs).
2This parsimonious specification contrasts with the use of spatial effects that would involve modelling over 3400 municipalities (counties).
3The ARM rate reset is the difference between the fully index rate and the origination rate: Rate reset j = fully indexed rate j − origination rate where fully indexed rate j = LIBOR rate j + margin j As the rate resets, the default rate will rise.