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Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default

Author

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  • Kristopher Gerardi
  • Kyle F. Herkenhoff
  • Lee E. Ohanian
  • Paul S. Willen

Abstract

This paper uses new data from the PSID to quantify the relative importance of negative equity versus ability to pay, in driving mortgage defaults between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. Changes in ability to pay have large estimated effects. Job loss has an equivalent effect on the propensity to default as a 35% decline in equity. Strategic motives are also found to be quantitatively important, as we estimate more than 38% of households in default could make their mortgage payments without reducing consumption. Received September 29, 2015; editorial decision June 2, 2017 by Editor Philip Strahan. Authors have furnished an Internet Appendix, which is available on the Oxford University PressWeb site next to the link to the final published paper online.

Suggested Citation

  • Kristopher Gerardi & Kyle F. Herkenhoff & Lee E. Ohanian & Paul S. Willen, 2018. "Can’t Pay or Won’t Pay? Unemployment, Negative Equity, and Strategic Default," The Review of Financial Studies, Society for Financial Studies, vol. 31(3), pages 1098-1131.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:3:p:1098-1131.
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    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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