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Mortgage defaults

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Author Info

  • Juan Carlos Hatchondo
  • Leonardo Martinez
  • Juan M. Sanchez

Abstract

We incorporate house price risk and mortgages into a standard incomplete market (SIM) model. We calibrate the model to match U.S. data, and we show that the model also accounts for non-targeted features of the data such as the distribution of down payments, the life-cycle prole of homeownership, and the mortgage default rate. In addition, we show that the average coefficients that measure the agents' ability to self-insure against income shocks are similar to those of a SIM model without housing (as presented by Kaplan and Violante, 2010). However, incorporating housing increases the values of these coefficients for younger agents, which narrows the gap between the SIM model's implications and the data. The response of consumption to house price shocks is minimal. We also study the effects of default prevention policies. Introducing a minimum down payment requirement of 15 percent reduces defaults on mortgages by 30 percent, reduces the homeownership rate up to only 0.2 percentage points (if the aggregate house price level does not adjust), and may cause house prices to decline up to 0.7 percent (if homeownership does not adjust). Garnishing defaulters' income in excess of 43 percent of median consumption for one year produces a similar decline in defaults; but, since it reduces the median equilibrium down payment from 19 percent to 9 percent, it boosts homeownership up to 4.3 percentage points (if the aggregate house price level does not adjust) and may increase house prices up to 16.1 percent (if homeownership does not adjust). The introduction of minimum down payments or income garnishment benefit a majority of the population.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Richmond in its series Working Paper with number 11-05.

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Date of creation: 2011
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Handle: RePEc:fip:fedrwp:11-05

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Keywords: Mortgages ; Default (Finance);

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References

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  1. Leonardo Martinez & Horacio Sapriza & Juan Carlos Hatchondo, 2010. "Quantitative Properties of Sovereign Default Models: Solution Methods Matter," IMF Working Papers 10/100, International Monetary Fund.
  2. Juan Carlos Hatchondo & Leonardo Martinez & Horacio Sapriza, 2010. "Online Appendix to "Quantitative properties of sovereign default models: solution methods"," Technical Appendices 08-133, Review of Economic Dynamics.
  3. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP).
  4. Joseph Gruber & Robert Martin, 2003. "Precautionary savings and the wealth distribution with illiquid durables," International Finance Discussion Papers 773, Board of Governors of the Federal Reserve System (U.S.).
  5. Carroll, Christopher D. & Otsuka, Misuzu & Slacalek, Jiri, 2010. "How large are housing and financial wealth effects? A new approach," Working Paper Series 1283, European Central Bank.
  6. Satyajit Chatterjee & Burcu Eyigungor, 2009. "Foreclosures and house price dynamics: a quantitative analysis of the mortgage crisis and the foreclosure prevention policy," Working Papers 09-22, Federal Reserve Bank of Philadelphia.
  7. Matthew Chambers & Carlos Garriga & Don E. Schlagenhauf, 2007. "Accounting for changes in the homeownership rate," Working Paper 2007-21, Federal Reserve Bank of Atlanta.
  8. Richard Blundell & Luigi Pistaferri & Ian Preston, 2004. "Consumption inequality and partial insurance," IFS Working Papers W04/28, Institute for Fiscal Studies.
  9. Athreya, Kartik, 2006. "Fresh start or head start? Uniform bankruptcy exemptions and welfare," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2051-2079, November.
  10. Corradin, Stefano & Fillat, Jose L. & Vergara, Carles, 2012. "Optimal portfolio choice with predictability in house prices and transaction costs," IESE Research Papers D/948, IESE Business School.
  11. Bolton, Patrick & Jeanne, Olivier, 2005. "Structuring and Restructuring Sovereign Debt: The Role of Seniority," CEPR Discussion Papers 4901, C.E.P.R. Discussion Papers.
  12. Campbell, John & Cocco, Joao, 2003. "Household Risk Management and Optimal Mortgage Choice," Scholarly Articles 3157876, Harvard University Department of Economics.
  13. Kurt Mitman, 2012. "Macroeconomic Effects of Bankruptcy and Foreclosure Policies," 2012 Meeting Papers 563, Society for Economic Dynamics.
  14. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
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  16. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
  17. Edward S. Knotek II & Stephen Terry, 2008. "Markov-chain approximations of vector autoregressions: application of general multivariate-normal integration techniques," Research Working Paper RWP 08-02, Federal Reserve Bank of Kansas City.
  18. Patrick Bajari & Chenghuan Sean Chu & Minjung Park, 2008. "An Empirical Model of Subprime Mortgage Default From 2000 to 2007," NBER Working Papers 14625, National Bureau of Economic Research, Inc.
  19. Yongheng Deng & John M. Quigley & Robert Van Order, 2000. "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Econometrica, Econometric Society, vol. 68(2), pages 275-308, March.
  20. Greg Kaplan & Giovanni L. Violante, 2009. "How Much Consumption Insurance Beyond Self-Insurance?," NBER Working Papers 15553, National Bureau of Economic Research, Inc.
  21. Anthony Pennington-Cross, 2004. "The value of foreclosed property," Working Papers 2004-022, Federal Reserve Bank of St. Louis.
  22. Dirk Krueger, 2012. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," 2012 Meeting Papers 102, Society for Economic Dynamics.
  23. Mark Bils & Mark Aguiar, 2010. "Has Consumption Inequality Mirrored Income Inequality?," 2010 Meeting Papers 1334, Society for Economic Dynamics.
  24. Borys Grochulski, 2010. "Optimal Personal Bankruptcy Design under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(2), pages 350-378, April.
  25. Bulent Guler, 2010. "Innovations in Information Technology and the Mortgage Market," 2010 Meeting Papers 856, Society for Economic Dynamics.
  26. Huggett, Mark, 1996. "Wealth distribution in life-cycle economies," Journal of Monetary Economics, Elsevier, vol. 38(3), pages 469-494, December.
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Citations

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Cited by:
  1. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sánchez, 2013. "Life cycle patterns and boom-bust dynamics in U.S. housing prices," Economic Synopses, Federal Reserve Bank of St. Louis.
  2. Kyle F. Herkenhoff & Lee Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers 2012-017, Federal Reserve Bank of St. Louis.
  3. Gerardi, Kristopher & Herkenhoff, Kyle F. & Ohanian, Lee E. & Willen, Paul S., 2013. "Unemployment, negative equity, and strategic default," Working Paper 2013-04, Federal Reserve Bank of Atlanta.
  4. Athreya, Kartik & Sánchez, Juan M. & Tam, Xuan S. & Young, Eric R., 2012. "Bankruptcy and delinquency in a model of unsecured debt," Working Papers 2012-042, Federal Reserve Bank of St. Louis, revised 30 Jan 2014.
  5. Kyle F. Herkenhoff, 2012. "Informal unemployment insurance and labor market dynamics," Working Papers 2012-057, Federal Reserve Bank of St. Louis.

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