The modern risk management of financial institutions increasingly applies methods of active risk controlling that base upon the measurement of market risk. Instruments of active risk controlling are, for example, hedging techniques and risk budgeting procedures. Motivations for active risk controlling were first driven by the increasing magnitude of market risk for the most part and as a result, the Value at-risk concept has become the standard tool to specify risk.
The purpose of this paper is to study the factors that affect prepayment of fixed-rate home equity loans. While most studies of prepayment have focused on conventional primary mortgages, few published studies have analyzed the prepayment of home equity loans, especially at the loan level. In this paper, we study the prepayment behavior of home equity loans empirically using a large loan-level data set.
Home equity loans have changed over the past 10 years. Prior to the mid-1990s, home equity loans generally referred to second-lien mortgage loans that were originated to consolidate debt or finance large expenditures, such as education, home improvement or medical treatment. Although home equity loans may have a fixed or floating rate or a hybrid of the two, fixed rate home equity loans dominated issuance during much of the mid-1990s. During this period, home equity loans usually took the form of home equity lines of credit, and were usually open-ended. After the mid-1990s, the home equity loan market moved towards longer (and fixed) terms, larger loan balances, and more first liens (Schorin, Heins, and Prasad 2003). The home equity loans studied in this paper were issued between 1995 and 1998. Given this timing, the loans have some features of both the older and the newer characteristics of home equity loans; they are 15-year, fixed-rate second-lien mortgages to both prime and sub-prime borrowers.
What is a debt crisis? The literature has so far paid little attention to the definition of a deb t crisis in the context of foreign lending. Instead, most studies typically assume that sovereign defaults are the most relevant credit events for foreign debt contracts. As a result, a large body of work has focused on the determinants of default risk.
Sovereign defaults are not, however, the only possible outcome of serious foreign- debt-servicing difficulties. For instance, the period starting with the Mexican “crisis” in 1994–95 has been characterized by turbulent sovereign debt markets and substantial IMF assistance to a number of countries. Yet, according to Moody’s (2003) only seven rated sovereign bond issuers have defaulted on their foreign-currency denominated bonds since 1985 and all of those defaults happened between 1998 and 2002. The surprisingly low number of sovereign bond defaults by emerging market sovereign borrowers is in contrast to the numerous defaults on bank loans in the 1980s.
