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Downpayment, mobility and default: A welfare analysis

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  • Mnasri, Ayman

Abstract

In this paper, I study the impact of the relaxation of downpayment requirements on home-ownership and default risk in the context of a static spatial life cycle model. Given its quantitative success in matching the U.S. home-ownership curve, my model represents a reasonable benchmark for assessing the efficiency of mortgage default prevention policies. I find that both income and geographical mobility are the main trigger factors for default decisions. In fact, households with a higher mobility (i.e. young households) rate are more likely to default. According to the welfare analysis, I suggest that policymakers include a minimum downpayment requirement of 9.5% in the new definition of the Qualified Residential Mortgage (QRM). This number should, however, be viewed with some caution, since I focus on a steady-state economy, in which house prices are constant. In fact, house prices represent an important factor influencing the default rate. Potentially, the optimal minimum downpayment requirement should be set at a higher value than 9.5%.

Suggested Citation

  • Mnasri, Ayman, 2018. "Downpayment, mobility and default: A welfare analysis," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 235-252.
    • Handle: RePEc:eee:jmacro:v:55:y:2018:i:c:p:235-252
    DOI: 10.1016/j.jmacro.2017.11.001
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    Cited by:

    1. Giacomo De Giorgi & Costanza Naguib, 2022. "Life after Default: Credit Hardship and its Effects," Diskussionsschriften dp2206, Universitaet Bern, Departement Volkswirtschaft.
    2. Giacomo De Giorgi & Costanza Naguib, 2023. "Life after (Soft) Default," Papers 2306.00574, arXiv.org.

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