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Mortgage Default during the U.S. Mortgage Crisis

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  • Thomas Schelkle

Abstract

Which of the main competing theories of mortgage default can quantitatively explain the rise in default rates during the U.S. mortgage crisis? This paper finds that the double-trigger hypothesis attributing mortgage default to the joint occurrence of negative equity and a life event like unemployment is consistent with the evidence. In contrast a traditional frictionless default model predicts a too strong increase in default rates. The paper also provides micro-foundations for double-trigger behavior in a model where unemployment may cause liquidity problems for the borrower. Using this framework for policy analysis reveals that a mortgage crisis may be mitigated at a lower cost by relieving the liquidity problems of borrowers instead of bailing out lenders.

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Paper provided by University of Cologne, Department of Economics in its series Working Paper Series in Economics with number 72.

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Date of creation: 16 May 2014
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Handle: RePEc:kls:series:0072

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Keywords: Mortgage default; mortgage crisis; house prices; negative equity;

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Cited by:
  1. Andreas Fuster & Paul S. Willen, 2013. "Payment Size, Negative Equity, and Mortgage Default," NBER Working Papers 19345, National Bureau of Economic Research, Inc.

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