Cause and Effect: The Role of Loan-Level Mortgage Characteristics in RMBS Losses

Abstract

The recent credit crisis has sparked a debate among market participants as to the causes and sources of unprecedented defaults and losses in residential mortgage-backed securities. Conventional wisdom has long held that loans with certain risk characteristics have a higher likelihood of future default. However, an examination of performance data for a select number of representative subprime securities originated at the top of the credit boom in 2006 paints a different picture. This analysis finds that macroeconomic factors, such as house price depreciation and unemployment, among others, clearly outweighed risks inherent in loan-level characteristics.