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Mortgage-Default Research and the Recent Foreclosure Crisis

Author

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  • Christopher L. Foote

    (Federal Reserve Bank of Boston, Boston, Massachusetts 02210, USA)

  • Paul S. Willen

    (Federal Reserve Bank of Boston, Boston, Massachusetts 02210, USA)

Abstract

This article reviews the surge in research on mortgage default inspired by the recent foreclosure crisis. Economists already understood a great deal about default, both theoretically and empirically, when the crisis began, but new research has moved the frontier further by improving data sources, building dynamic optimizing models of default, and explicitly addressing reverse causality between rising foreclosures and falling house prices. Mortgage defaults also featured prominently in early papers that pointed to subprime and other privately securitized mortgages as fundamental drivers of the housing boom, although this research has been criticized recently. Going forward, improvements to data and models will allow researchers to make progress on the two central questions in this literature. First, what are the relative contributions of adverse life events and negative equity to mortgage default? Second, why is default so rare, even among people with deep negative equity or acute financial distress?

Suggested Citation

  • Christopher L. Foote & Paul S. Willen, 2018. "Mortgage-Default Research and the Recent Foreclosure Crisis," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 59-100, November.
  • Handle: RePEc:anr:refeco:v:10:y:2018:p:59-100
    DOI: 10.1146/annurev-financial-110217-022541
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    Cited by:

    1. Charles Ka Yui Leung & Joe Cho Yiu Ng, 2018. "Macro Aspects of Housing," GRU Working Paper Series GRU_2018_016, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    2. Duc Duy Nguyen & Steven Ongena & Shusen Qi & Vathunyoo Sila, 2022. "Climate Change Risk and the Cost of Mortgage Credit [Does climate change affect real estate prices? Only if you believe in it]," Review of Finance, European Finance Association, vol. 26(6), pages 1509-1549.
    3. Koşar, Gizem & Ransom, Tyler & van der Klaauw, Wilbert, 2022. "Understanding migration aversion using elicited counterfactual choice probabilities," Journal of Econometrics, Elsevier, vol. 231(1), pages 123-147.
    4. Alin Marius Andries & Anca Copaciu & Radu Popa & Razvan Vlahu, 2021. "Recourse and (strategic) mortgage defaults: Evidence from changes in housing market laws," Working Papers 727, DNB.
    5. Sumit Agarwal & Slava Mikhed & Barry Scholnick & Man Zhang, 2022. "Reducing Strategic Default in a Financial Crisis," Working Papers 21-36, Federal Reserve Bank of Philadelphia.
    6. McCann, Fergal & O'Malley, Terry, 2020. "Resolving mortgage distress after COVID-19: some lessons from the last crisis," Financial Stability Notes 7/FS/20, Central Bank of Ireland.
    7. Manuel Adelino & W. Ben McCartney & Antoinette Schoar, 2020. "The Role of Government and Private Institutions in Credit Cycles in the U.S. Mortgage Market," Working Papers 20-40, Federal Reserve Bank of Philadelphia.
    8. Bracke, Philippe & Datta, Anupam & Jung, Carsten & Sen, Shayak, 2019. "Machine learning explainability in finance: an application to default risk analysis," Bank of England working papers 816, Bank of England.
    9. Margaret Jacobson, 2019. "Beliefs, Aggregate Risk, and the U.S. Housing Boom," 2019 Meeting Papers 1549, Society for Economic Dynamics.
    10. Manuel Adelino & William B. McCartney & Antoinette Schoar, 2020. "The Role of Government and Private Institutions in Credit Cycles in the U.S. Mortgage Market," NBER Working Papers 27499, National Bureau of Economic Research, Inc.
    11. Jan K. Brueckner & James N. Conklin & N. Edward Coulson & Moussa Diop, 2023. "Default Costs and Repayment of Underwater Mortgages," CESifo Working Paper Series 10755, CESifo.
    12. Kösem, Sevim, 2021. "Income inequality, mortgage debt and house prices," Bank of England working papers 921, Bank of England.
    13. Christopher L. Foote & Lara Loewenstein & Paul S. Willen, 2018. "Technological Innovation in Mortgage Underwriting and the Growth in Credit: 1985-2015," Working Papers (Old Series) 1816, Federal Reserve Bank of Cleveland.
    14. Stephen L. Ross & Yuan Wang, 2022. "Mortgage Lenders and the Geographic Concentration of Foreclosures," Working Papers 2022-001, Human Capital and Economic Opportunity Working Group.
    15. Jackson T. Anderson & David M. Harrison & Michael J. Seiler, 2022. "Reducing Strategic Forbearance under the CARES Act: an Experimental Approach Utilizing Recourse Attestation," The Journal of Real Estate Finance and Economics, Springer, vol. 65(2), pages 230-260, August.
    16. Terry O'Malley, 2021. "The Impact of Repossession Risk on Mortgage Default," Journal of Finance, American Finance Association, vol. 76(2), pages 623-650, April.
    17. Mayock, Tom & Tzioumis, Konstantinos, 2021. "New construction and mortgage default," Journal of Banking & Finance, Elsevier, vol. 133(C).
    18. Michelle Bergmann, 2020. "The Determinants of Mortgage Defaults in Australia – Evidence for the Double-trigger Hypothesis," RBA Research Discussion Papers rdp2020-03, Reserve Bank of Australia.
    19. Sandler, Ryan, 2023. "Aligning incentives: The effect of mortgage servicing rules on foreclosures and delinquency," Regional Science and Urban Economics, Elsevier, vol. 102(C).
    20. Nadav Ben Zeev, 2019. "Adjustable-Rate Mortgages, Systematic Monetary Policy, And The Root Cause Of The Financial Crisis," Working Papers 1908, Ben-Gurion University of the Negev, Department of Economics.

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    More about this item

    Keywords

    mortgage default; foreclosures; housing boom and bust; financial crisis;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R31 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Housing Supply and Markets

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