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Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option

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  • Wayne Archer
  • Brent Smith

Abstract

House price volatility; lender and borrower perception of price trends, loan and property features; and the borrower’s put option are integrated in a model of residential mortgage default. These dimensions of the default problem have, to our knowledge, not previously been considered altogether within the same investigation framework. We rely on a sample of individual mortgage loans for 20 counties in Florida, over the period 2001 through 2008, third quarter, with housing price performance obtained from repeat sales analysis of individual transactions. The results from the analysis strongly confirm the significance of the borrower’s put as an operative factor in default. At the same time, the results provide convincing evidence that the experience in Florida is in part driven by lenders and purchasers exhibiting euphoric behavior such that in markets with higher price appreciation there is a willingness to accept recent prior performance as an indicator of future risk. This connection illustrates a familiar moral hazard in the housing market due to the limited information about future prices. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Wayne Archer & Brent Smith, 2013. "Residential Mortgage Default: The Roles of House Price Volatility, Euphoria and the Borrower’s Put Option," The Journal of Real Estate Finance and Economics, Springer, vol. 46(2), pages 355-378, February.
    • Handle: RePEc:kap:jrefec:v:46:y:2013:i:2:p:355-378
    DOI: 10.1007/s11146-011-9335-y
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    References listed on IDEAS

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    7. Foote, Christopher L. & Gerardi, Kristopher & Willen, Paul S., 2008. "Negative equity and foreclosure: Theory and evidence," Journal of Urban Economics, Elsevier, vol. 64(2), pages 234-245, September.
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    Cited by:

    1. Brent C Smith & Kenneth N. Daniels, 2018. "Unintended Consequences of Risk Based Pricing: Racial Differences in Mortgage Costs," Journal of Financial Services Research, Springer;Western Finance Association, vol. 54(3), pages 323-343, December.
    2. Rao-Nicholson, Rekha & Ayton, Julie (Salaber), 2016. "Euphoria in financial markets: How Indian companies generate value in their cross-border acquisitions," Research in International Business and Finance, Elsevier, vol. 38(C), pages 494-508.
    3. Ebrahim, M. Shahid & Jaafar, Aziz & Omar, Fatma A. & Salleh, Murizah Osman, 2016. "Can Islamic injunctions indemnify the structural flaws of securitized debt?," Journal of Corporate Finance, Elsevier, vol. 37(C), pages 271-286.
    4. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 1-19, September.
    5. Kimberly R. Goodwin & Ken H. Johnson, 2017. "The Short Sale Stigma," The Journal of Real Estate Finance and Economics, Springer, vol. 55(4), pages 416-434, November.
    6. Nijskens, Rob & Mokas, Dimitris, 2019. "Credit Risk in Commercial Real Estate Bank Loans : The Role of Idiosyncratic versus Macro-Economic Factors," Other publications TiSEM ea4f2f0e-dc50-4987-91d3-6, Tilburg University, School of Economics and Management.
    7. Asish Saha & Hock-Eam Lim & Goh-Yeok Siew, 2021. "Housing Loan Repayment Behaviour in Malaysia: An Analytical Insight," International Journal of Business and Economics, School of Management Development, Feng Chia University, Taichung, Taiwan, vol. 20(2), pages 141-159, September.
    8. Demyanyk, Yuliya, 2017. "The impact of missed payments and foreclosures on credit scores," The Quarterly Review of Economics and Finance, Elsevier, vol. 64(C), pages 108-119.
    9. Ahmed S. Abou-Zaid & Tesa Leonce, 2014. "Religious Pluralism, yet a Homogenous Stance on Interest Rate: The Case of Judaism, Christianity, and Islam," Contemporary Economics, University of Economics and Human Sciences in Warsaw., vol. 8(2), June.
    10. Timothy Jones & Dean Gatzlaff & G. Stacy Sirmans, 2016. "Housing Market Dynamics: Disequilibrium, Mortgage Default, and Reverse Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 53(3), pages 269-281, October.

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    More about this item

    Keywords

    Residential mortgage default; Risk; Lending; Housing economics; Mortgage underwriting; G21; R11; R20; R21;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R20 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - General
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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