Structural modelling of subprime mortgages

With the economy still suffering from the waves of the credit crunch, triggered by a housing price slump, Yong Kim provides a structural model of subprime mortgages based on housing market risks. Given the enormity of the subprime mortgage market failure, he questions the methodologies used by the rating agencies to assign credit ratings to subprime CDO tranches. The structural model is meant to be an alternative CDO rating model for subprime mortgages to the traditional rating-based CDO models

Unlike past housing market cycle downturns, this one has caused havoc in financial markets, through write-offs on securities linked to subprime mortgages. There is plenty of blame to go around.1 Investors have chased after ever-higher yields to their investment and investment bankers have provided collateralised debt obligations (CDO) of subprime mortgages to satisfy that demand. Lenders, who have supplied collateral to investment bankers, may have made subprime mortgage loans to borrowers who