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

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This paper exploits matched data from the PSID on borrower mortgages with income and demographic data to quantify the relative importance of negative equity, versus lack of ability to pay, as affecting default between 2009 and 2013. These data allow us to construct household budgets sets that provide better measures of ability to pay. We use instrumental variables to quantify the impact of ability to pay, including job loss and disability, versus negative equity. Changes in ability to pay have the largest estimated effects. Job loss has an equivalent effect on default likelihood as a 35 percent decline in equity.

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File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/2013/04a-cant-pay-or-wont-pay-unemployment-negative-equity-and-strategic-default-2017-06-30.pdf
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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper with number 2013-04.

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Length: 47 pages
Date of creation: 01 Aug 2013
Date of revision: 01 Jun 2017
Handle: RePEc:fip:fedawp:2013-04
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