We examine foreclosures on FHA single family mortgages insured during 1975-87. The importance of the market value of borrower equity, and of the dispersion of national house prices support much earlier work emphasizing the key role of negative equity in triggering default. The lower the "mean" market value of equity is, and the greater dispersion is, the more borrowers will be likely to have negative equity. The unemployment rate and the book value of borrower equity also are significant determinants of default. Unemployment is one event that can force borrowers to move. The decision to move increases the likelihood of default, because moving costs no longer deter default, and the costs of selling the house reduce the effective equity in the house. The book value of equity also is relevant to this decision, because it is what sellers will receive if they move without defaulting. Both of these variables are significant determinants of default, but the employment impact rises as book equity declines (with large book equity, unemployment should not matter, because selling the house is preferred to default).
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
4440.
Length: Date of creation: Aug 1993 Date of revision: Handle: RePEc:nbr:nberwo:4440
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Find related papers by JEL classification: G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
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