Journal of Real Estate Finance and Economics, 23:2, 131±137, 2001
# 2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Introduction to the Special Issue on Mortgage
CHARLES A. CAPONE, JR.
Congressional Budget Of®ce, Ford House Of®ce Building, Washington, DC 20515
1. Mortgage modeling: How it all began
This special issue of the Journal of Real Estate Finance and Economics is devoted to
mortgage modeling. Suchresearchhas been a large part of my professional life for 15
years, and I am pleased to present this volume to Journal readers. In approaching the topic,
I note that the type of modeling used in economic and ®nancial research follows the
twelfthde®nition of the word found in Webster's Collegiate Dictionary: ``A system of
postulates, data, and inferences presented as a mathematical description of an entity or
state of affairs.''
In the area of mortgages, such models are most often built to represent life cycles of
loans collateralized by real property. This is our focus here, and so this also could be called
a special issue on mortgage performance modeling. To date, most researchhas been on
single-family property ®rst liens, due to both the size of the market and the availability of
data. But the research ®eld of mortgage modeling also includes performance of loans on
apartments and other commercial properties, manufactured housing, condominiums and
coops, and second liens. Mortgages are complex legal instruments, and so mortgage
modeling involves contracts, (state) property law, (federal) bankruptcy law, consumer
behavior, ®rm behavior, ®nancial markets, and business cycles.
The seeds of mortgage modeling as a research ®eld go back at least to the Great
Depression. The dramatic increase in home mortgage foreclosures during that time
brought national attention in the United States to the issue of what factors in¯uence
propensities of loans to default. The President's Conference on Home Building and Home
Ownership issued a draft report in late 1931 providing a detailed overview of the (then)
current problem of home foreclosure. It highlighted (in)adequacy of downpayments, the
use of second mortgages, balloon versus amortizing loans, foreclosure laws, and
neighborhood decay. All of these issues remain of research importance today.
Modern statistical mortgage modeling began withthe work of George von Furstenberg
(1969, 1970a, 1970b). His work used regression analysis to study (unconditional) annual
default rates on pools of FHA- and VA-insured single-family loans, using initial
downpayment rates and age as explanatory variables.
Published at the same time, the
work of Herzog and Early (1970) examined a large cross-sectional (survey) database that
covered FHA, VA, and conventional (single-family) loan delinquencies and foreclosures.
But it was von Furstenberg who focused on modeling the lifecycle of loans. This
approachÐsometimes called survival analysis or duration modelingÐhas been the