Advanced Search
MyIDEAS: Login to save this article or follow this journal

Negative equity and foreclosure: Theory and evidence

Contents:

Author Info

  • Foote, Christopher L.
  • Gerardi, Kristopher
  • Willen, Paul S.

Abstract

Recent declines in housing prices have focused attention on the relationship between negative housing equity and mortgage default. Theory implies that negative equity is a necessary condition for default, but not a sufficient one. This often-misunderstood result is clearly illustrated in a dataset of Massachusetts homeowners during the early 1990s; fewer than 10 percent of borrowers likely to have had negative equity at the end of 1991 experienced a foreclosure during the following three years. An econometric model of default estimated on two decades of Massachusetts housing data also predicts low default rates for current negative-equity borrowers. We develop a simple theoretical model to interpret these empirical findings and to assess potential foreclosure-reduction policies. Our results imply that lenders and policymakers face an information problem in trying to help borrowers with negative equity, because it is hard to determine which owners really need help in order to stay in their homes.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/B6WMG-4T2M5SG-1/2/f69441d0ed3deeb014be97f552ce5b7c
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 64 (2008)
Issue (Month): 2 (September)
Pages: 234-245

as in new window
Handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:234-245

Contact details of provider:
Web page: http://www.elsevier.com/locate/inca/622905

Related research

Keywords:

Other versions of this item:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Anthony Pennington-Cross & Giang Ho, 2006. "The termination of subprime hybrid and fixed rate mortgages," Working Papers, Federal Reserve Bank of St. Louis 2006-042, Federal Reserve Bank of St. Louis.
  2. Christopher L. Foote & Kristopher Gerardi & Lorenz Goette & Paul S. Willen, 2008. "Subprime facts: what (we think) we know about the subprime crisis and what we don’t," Public Policy Discussion Paper, Federal Reserve Bank of Boston 08-2, Federal Reserve Bank of Boston.
  3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers, Federal Reserve Bank of Boston 07-15, Federal Reserve Bank of Boston.
  4. Deng, Yongheng & Gabriel, Stuart, 2006. "Risk-Based Pricing and the Enhancement of Mortgage Credit Availability among Underserved and Higher Credit-Risk Populations," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 38(6), pages 1431-1460, September.
  5. Kau James B. & Keenan Donald C. & Kim Taewon, 1994. "Default Probabilities for Mortgages," Journal of Urban Economics, Elsevier, Elsevier, vol. 35(3), pages 278-296, May.
  6. Stanton, Richard, 1995. "Rational Prepayment and the Valuation Mortgage-Backed Securities," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 8(3), pages 677-708.
  7. Souphala Chomsisengphet & Anthony Pennington-Cross, 2006. "The evolution of the subprime mortgage market," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jan, pages 31-56.
  8. Kau, James B. & Keenan, Donald C. & Muller, Walter III & Epperson, James F., 1987. "The valuation and securitization of commercial and multifamily mortgages," Journal of Banking & Finance, Elsevier, Elsevier, vol. 11(3), pages 525-546, September.
  9. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, Econometric Society, vol. 68(2), pages 275-308, March.
  10. Titman, Sheridan D & Torous, Walter N, 1989. " Valuing Commercial Mortgages: An Empirical Investigation of the Contingent-Claims Approach to Pricing Risky Debt," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 345-73, June.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:234-245. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.