extended abstractfor submissiontothe annual a r e u e a（扩展abstractfor submissiontothe年度r e u e）.doc

Delinquency and Default in ARMs: The Effects of Loss Aversion and Protected Equity Alan Hwee Loon TEO Email: teoalanhl@.sg Seow Eng ONG Email: seong@.sg Key words Default risk, Bivariate Probit, Loss Aversion Please direct comments to Alan Hwee Loon TEO at Department of Real Estate, National University of Singapore, 4 Architecture Drive, Singapore 117566, or email: teoalanhl@.sg Extended abstract Motivation With the growth of the private residential property markets worldwide, mortgage lending has become an imperative component of the businesses of financial institutions. Consequently, secondary mortgage markets have also been expanding rapidly. Understanding the various types of mortgage risk is thus essential, for both practitioners and academics. Default risk (e.g. Quigley and Van Order, 1990), prepayment risks (e.g. Ong, 2000; and Ambrose and LaCour-Little, 2001) and the competing relationship between them (e.g. Deng, Quigley and van Order, 2000; and Clapp, Deng and An, 2004) are areas of intense study. However, studies on mortgage delinquency or the incorporation of delinquency in overall mortgage risk models are far and few. This can be attributed to a lack of suitable available data (Von Furstenberg and Green, 1974), difficulties in modeling delinquency within the prevailing option-based approach (Quercia and Stegman, 1992), and perception among practitioners that the financial consequences of delinquency is less severe than default (Quercia and Stegman, 1992). In this paper, we postulate mortgage delinquency as a significant and necessary decision that is taken by the borrower before the default decision. We further propose that motivations of the preceding delinquency decision exert a significant influence on the subsequent motivations of default such that mortgage risk models should incorporate the risk of delinquency. There is no consensus on the definitions of delinquency and default in past studies. We advocate the set of definition