Contagious Mortgage Default
AbstractThis paper analyses the default option typical to American mortgages. House-holds borrow to buy durable housing, but future house prices are uncertain, and households find it advantageous to default on their debt if house prices fall suffi- ciently. A key assumption of the model is that households are relegated to the rental market upon default, and that there is a small pecuniary inefficiency (“iceberg cost”) in renting. This leads defaulters to substitute consumption of other goods for housing; that is, the demand for housing falls upon default. Consequently, when some households default, aggregate demand for housing is reduced, hence house prices fall more, possibly inciting other households to default. This complementarity is a source of multiple equilibria, and a price externality. Using a specific case for which an analytical solution can be derived, I show that contagion is possible: it may be that the default of a minority (interpretable as sub-prime borrowers) spreads to a majority (interpretable as prime borrowers).
Download InfoIf 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.
Bibliographic InfoPaper provided by Oslo University, Department of Economics in its series Memorandum with number 10/2010.
Length: 36 pages
Date of creation: 29 Jun 2010
Date of revision:
Contact details of provider:
Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Phone: 22 85 51 27
Fax: 22 85 50 35
Web page: http://www.oekonomi.uio.no/indexe.html
More information through EDIRC
Housing demand; Mortgage market; Default risk; Multiple equilibria Contagion;
Find related papers by JEL classification:
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-12-18 (All new papers)
- NEP-MAC-2010-12-18 (Macroeconomics)
- NEP-URE-2010-12-18 (Urban & Real Estate Economics)
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.:
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009.
"Why Don't Lenders Renegotiate More Home Mortgages? Redefaults, Self-Cures and Securitization,"
NBER Working Papers
15159, National Bureau of Economic Research, Inc.
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages?: redefaults, self-cures, and securitization," Public Policy Discussion Paper 09-4, Federal Reserve Bank of Boston.
- Manuel Adelino & Kristopher Gerardi & Paul S. Willen, 2009. "Why don't lenders renegotiate more home mortgages? redefaults, self-cures, and securitization," Working Paper 2009-17, Federal Reserve Bank of Atlanta.
- Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008.
"Negative equity and foreclosure: theory and evidence,"
Public Policy Discussion Paper
08-3, Federal Reserve Bank of Boston.
- Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
- Peck, James & Shell, Karl, 2001.
"Equilibrium Bank Runs,"
01-10r, Cornell University, Center for Analytic Economics.
- Yongheng Deng & John M. Quigley & Robert Van Order, 2000.
"Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options,"
Econometric Society, vol. 68(2), pages 275-308, March.
- Deng, Yongheng & Quigley, John M. & Van Order, Robert, 1999. "Mortgage Terminations, Heterogeneity, and the Exercise of Mortgage Options," Berkeley Program on Housing and Urban Policy, Working Paper Series qt96r560pg, Berkeley Program on Housing and Urban Policy.
- Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
- Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011.
"Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises,"
NBER Working Papers
17537, National Bureau of Economic Research, Inc.
- Jeske, Karsten & Krueger, Dirk & Mitman, Kurt, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," CEPR Discussion Papers 8624, C.E.P.R. Discussion Papers.
- Dirk Krueger, 2012. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," 2012 Meeting Papers 102, Society for Economic Dynamics.
- Karsten Jeske & Dirk Krueger & Kurt Mitman, 2011. "Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises," PIER Working Paper Archive 11-034, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
- 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.
- Gervais, Martin, 2002.
"Housing taxation and capital accumulation,"
Journal of Monetary Economics,
Elsevier, vol. 49(7), pages 1461-1489, October.
- Morris A. Davis & Francois Ortalo-Magne, 2011.
"Household Expenditures, Wages, Rents,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 248-261, April.
- Morris Davis & Francois Ortalo-Magne, 2010. "Code files for "Household Expenditures, Wages, Rents"," Computer Codes 09-92, Review of Economic Dynamics.
- Morris A. Davis & François Ortalo-Magné, 2007. "Household Expenditures, Wages, Rents," CESifo Working Paper Series 2156, CESifo Group Munich.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Rhiana Bergh-Seeley).
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.