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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 FRB Atlanta 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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  2. Benítez-Silva, Hugo & Eren, Selçuk & Heiland, Frank & Jiménez-Martín, Sergi, 2015. "How well do individuals predict the selling prices of their homes?," Journal of Housing Economics, Elsevier, vol. 29(C), pages 12-25.
  3. Christopher L. Foote & Kristopher S. Gerardi & Paul S. Willen, 2008. "Negative equity and foreclosure: theory and evidence," Public Policy Discussion Paper 08-3, Federal Reserve Bank of Boston.
  4. Carlos Hatchondo, Juan & Martinez, Leonardo & Sánchez, Juan M., 2015. "Mortgage defaults," Journal of Monetary Economics, Elsevier, vol. 76(C), pages 173-190.
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  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.
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