The Performance of UK Securitized Subprime Mortgage Debt: ‘Idiosyncratic’ Behaviour or Mortgage Design?

The research estimates a competing risk model of mortgage terminations on a sample of UK securitized subprime mortgages. We consider whether the variety of mortgage contracts that were securitized explains the performance of subprime securities and their supposed ‘idiosyncratic’ behaviour. The methodological advance is the use of a general, flexible modelling of unobserved heterogeneity over several dimensions, controlling for both selection issues involving mortgage choice and dynamic selection over time. We conclude that securities consisting of subprime loans can be given meaningful valuations on bank balance sheets if the performance of the different types of loans can be better understood. JEL Codes: G21 C13 C25 C51 D10 D14 E4