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Equity and Nonequity Determinants of FHA Single-Family Mortgage Foreclosures in the 1980s

  • Patric H. Hendershott
  • William R. Schultz

We examine foreclosures on FHA single-family mortgages insured during the 1975-87 period. The importance of the market value of borrower equity and national house price dispersion support much earlier work emphasizing the key role of negative equity in triggering default. The lower is "mean" market-value equity, and the greater is dispersion, the greater is the fraction of borrowers likely to have negative equity. The unemployment rate and the book value of borrower equity are also shown to be significant determinants of default. Unemployment is one of those events that can force borrowers to move. The moving decision 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 is relevant to this decision because it is what the sellers receive if they move without defaulting. Not only are both of these variables significant determinants of default, but the smaller is book equity, the greater is employment impact (with large book equity, unemployment should not matter because selling the house is preferred to default). Copyright American Real Estate and Urban Economics Association.

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Article provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.

Volume (Year): 21 (1993)
Issue (Month): 4 ()
Pages: 405-430

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Handle: RePEc:bla:reesec:v:21:y:1993:i:4:p:405-430
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  1. Patric H. Hendershott, 1985. "Pricing Adjustable Rate Mortgages," NBER Working Papers 1548, National Bureau of Economic Research, Inc.
  2. Chester Foster & Robert Order, 1985. "FHA Terminations: A Prelude to Rational Mortgage Pricing," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 273-291.
  3. S. Michael Giliberto & Arthur L. Houston, 1989. "Relocation Opportunities and Mortgage Default," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(1), pages 55-69.
  4. Kerry D. Vandell & Thomas Thibodeau, 1985. "Estimation of Mortgage Defaults Using Disaggregate Loan History Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 13(3), pages 292-316.
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