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Unemployment, negative equity, and strategic default

  • Gerardi, Kristopher

    ()

    (Federal Reserve Bank of Atlanta)

  • Herkenhoff, Kyle F.

    ()

    (University of California-Los Angeles)

  • Ohanian, Lee E.

    ()

    (University of California-Los Angeles)

  • Willen, Paul S.

    ()

    (Federal Reserve Bank of Atlanta)

Using new household-level data, we quantitatively assess the roles that job loss, negative equity, and wealth (including unsecured debt, liquid assets, and illiquid assets) play in default decisions. In sharp contrast to prior studies that proxy for individual unemployment status using regional unemployment rates, we find that individual unemployment is the strongest predictor of default. We find that individual unemployment increases the probability of default by 5–13 percentage points, ceteris paribus, compared with the sample average default rate of 3.9 percent. We also find that only 13.9 percent of defaulters have both negative equity and enough liquid or illiquid assets to make one month's mortgage payment. This finding suggests that "ruthless" or "strategic" default during the 2007–09 recession was relatively rare and that policies designed to promote employment, such as payroll tax cuts, are most likely to stem defaults in the long run rather than policies that temporarily modify mortgages.

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File URL: http://www.frbatlanta.org/documents/pubs/wp/wp1304.pdf
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Paper provided by Federal Reserve Bank of Atlanta in its series Working Paper with number 2013-04.

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Length: 50 pages
Date of creation: 01 Aug 2013
Date of revision:
Handle: RePEc:fip:fedawp:2013-04
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  1. John Gathergood, . "Income Shocks, Mortgage Repayment Risk and Financial Distress Among UK Households," Discussion Papers 09/03, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
  2. Juan Carlos Hatchondo & Leonardo Martinez & Juan M. Sánchez, 2011. "Mortgage defaults," Working Papers 2011-019, Federal Reserve Bank of St. Louis.
  3. Kristopher Gerardi & Adam Hale Shapiro & Paul S. Willen, 2007. "Subprime outcomes: risky mortgages, homeownership experiences, and foreclosures," Working Papers 07-15, Federal Reserve Bank of Boston.
  4. Yongheng Deng & John M. Quigley & Robert Van Order, . "Mortgage Terminations, Heterogeneity and the Exercise of Mortgage Options," Zell/Lurie Center Working Papers 322, Wharton School Samuel Zell and Robert Lurie Real Estate Center, University of Pennsylvania.
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  7. Jonathan Gruber, 2001. "The Wealth of the Unemployed," ILR Review, Cornell University, ILR School, vol. 55(1), pages 79-94, October.
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  9. David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, vol. 77(4), pages 725-748, October.
  10. Hugo Benítez-Silva & Selcuk Eren & Frank Heiland & Sergi Jiménez-Martín, 2008. "How Well do Individuals Predict the Selling Prices of their Homes?," Working Papers 2008-10, FEDEA.
  11. Andrew Haughwout & Richard Peach & Joseph Tracy, 2008. "Juvenile delinquent mortgages: bad credit or bad economy?," Staff Reports 341, Federal Reserve Bank of New York.
  12. Boheim, Rene & Taylor, Mark P., 2000. "My Home Was My Castle: Evictions and Repossessions in Britain," Journal of Housing Economics, Elsevier, vol. 9(4), pages 287-319, December.
  13. Kyle F. Herkenhoff & Lee Ohanian, 2012. "Foreclosure delay and U.S. unemployment," Working Papers 2012-017, Federal Reserve Bank of St. Louis.
  14. 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.
  15. Andra C. Ghent & Marianna Kudlyak, 2011. "Recourse and Residential Mortgage Default: Evidence from US States 1," Review of Financial Studies, Society for Financial Studies, vol. 24(9), pages 3139-3186.
  16. Campbell, Tim S & Dietrich, J Kimball, 1983. " The Determinants of Default on Insured Conventional Residential Mortgage Loans," Journal of Finance, American Finance Association, vol. 38(5), pages 1569-81, December.
  17. Christopher L. Foote & Kristopher Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper 08-3, Federal Reserve Bank of Boston.
  18. Sauro Mocetti & Eliana Viviano, 2015. "Looking behind mortgage delinquencies," Temi di discussione (Economic working papers) 999, Bank of Italy, Economic Research and International Relations Area.
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